J Regul Econ (2006) 30:63–84 DOI 10.1007/s11149-006-0009-2 ORIGINAL ARTICLE Strategic regulation policy in the Internet Øystein Foros · Hans Jarle Kind · Lars SØrgard © Springer Science+Business Media, LLC 2006 Abstract Some countries are importers while others are exporters of global back- bone connectivity. At the same time, input components such as local access are non- traded. This paper analyzes a non-cooperative regulatory game between importing and exporting countries, assuming that the prices of both traded and non-traded inputs can be regulated. We show that exporting countries choose a more restrictive regulation of non-traded goods than importing countries do. We further show that a requirement of international non-discrimination may hurt importing countries, and give firms producing traded inputs incentives to invest in quality degradation. Keywords Complementarities · Regulation · Non-discrimination · Internet JEL Classification L13 · L51 · L96 1. Introduction Local access to the regional telephone network is an essential component in order to get connected to the Internet, and is by definition an internationally non-traded factor of production that must be provided locally. However, the Internet is by its very nature a global industry, where for instance global backbone connectivity is an essential internationally traded input. Backbone connectivity, being complementary to local access, is typically provided by large firms serving several countries. This has given rise to an international asymmetry, where some countries are exporters and others importers of backbone connectivity. Ø. Foros (B ) · H. J. Kind Norwegian School of Economics and Business Administration, N-5045 Bergen, Norway e-mail:oystein.foros@nhh.no H. J. Kind e-mail: hans.kind@nhh.no L. Sørgard Norwegian Competition Authority, Olav Kyrres gate 8, N-5014 Bergen, Norway e-mail:lars.sorgard@kt.n