Network Cooperation vs. Network Competition

This paper examines fixed-cost investment decisions in networks on duopolistic markets with service customization. We show that, in contrast to the Hotelling case for differentiated services, the duopolists choose a socially optimal investment level. This outcome is compared to a cooperative investment in a joint network. As opposed to the case of co-operation in a Hotelling setting, firms always cooperate if service customization takes place. We furthermore include a welfare analysis demonstrating that network cooperation increases consumer surplus. Moreover we show that cooperation does not increase the stability of a collusive agreement. Hence one can argue for an exemption from article 101 TFEU of network cooperation for service customization.