Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 903: Network Competition with Income Effects

Thomas TangerĂ¥s ()
Additional contact information
Thomas TangerĂ¥s: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

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

JEL-codes: L51; L96

39 pages, First version: February 29, 2012. Revised: January 8, 2014.

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