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This paper addresses the question of how the competitive situation in the downstream market, the services, and the innovative activity in the upstream market, the network infrastructure, interacts. The focus is on the vertical structure of the telecommunication market, which is analysed in the framework of a patent licensing model. The paper considers an integrated network provider who can implement a new technology for the network which reduces the costs of offering services over the network. This provider can charge a mark-up above the new lower cost level from the service providers for the use of the new technology. The level of the mark-up is determined by a regulator who aims at promoting innovation.
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