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Research Institute of Industrial Economics (IFN) Working Paper Series

No 903:
Network Competition with Income Effects

Thomas Tangerås ()

Abstract: I generalize the workhorse model of network competition to include income effects in demand. Empirical work has shown income effects to be positive and statistically significant. Income effects deliver theoretical results consistent with regulatory concern about excessive termination rates: Unregulated network operators competing in non-discriminatory retail contracts negotiate termination rates above cost for any positive income effect. This also holds when operators discriminate between on-net and off-net calls if networks are differentiated. Operators profit from increasing termination rates above cost under second-degree price discrimination if a sufficient share of consumers prefer on-net/off-net contracts and their subscription demand is relatively inelastic.

Keywords: Income effects; Network competition; Profit neutrality; Second-degree price discrimination; Termination-based discrimination; (follow links to similar papers)

JEL-Codes: L51; L96; (follow links to similar papers)

39 pages, February 29, 2012, Revised January 8, 2014

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