Are two networks one too many? Optimal network sizes under uncertain technological progress

Abstract

Physical networks are often built under uncertainty about the future benefits of new network technologies. In this paper, we examine the trade-off between the gains from constructing a single, large physical network and the value of maintaining technological flexibility by building multiple, smaller networks. We derive conditions under which either one large network or several smaller networks are socially optimal, finding that socially optimal network allocations can arise as equilibria in a decentralized economy, but suboptimal equilibria may also occur. To address this, we propose a regulatory scheme that combines the auctioning of network licenses with subsidies to network operators, ensuring a socially optimal allocation through a unique equilibrium.