Premium
Network competition with income effects
Author(s) -
Tangerås Thomas P.
Publication year - 2014
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12066
Subject(s) - economics , microeconomics , competition (biology) , net income , negotiation , net profit , profit (economics) , business , finance , ecology , political science , law , biology
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 nondiscriminatory 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.