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Network Competition with Income Effects

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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.

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  • Tangerås, Thomas, 2012. "Network Competition with Income Effects," Working Paper Series 903, Research Institute of Industrial Economics, revised 08 Jan 2014.
  • Handle: RePEc:hhs:iuiwop:0903
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    1. Jullien, Bruno & Rey, Patrick & Sand-Zantman, Wilfried, 2013. "Termination fees revisited," International Journal of Industrial Organization, Elsevier, vol. 31(6), pages 738-750.
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    Cited by:

    1. Corrado Benassi & Marcella Scrimitore, 2017. "Income Distribution in Network Markets," Journal of Industry, Competition and Trade, Springer, vol. 17(3), pages 251-271, September.
    2. Robles-Rovalo, Arturo & Díaz-Goti, Emiliano & Guarneros-Gutiérrez, Rodrigo, 2018. "The Nature and Magnitude of the Effects of Asymmetric Regulation of Mobile Termination Rates on the Mexican Retail Prices," 22nd ITS Biennial Conference, Seoul 2018. Beyond the boundaries: Challenges for business, policy and society 190426, International Telecommunications Society (ITS).
    3. Thomas P. Tangerås, 2014. "Network competition with income effects," RAND Journal of Economics, RAND Corporation, vol. 45(3), pages 645-673, September.
    4. Ángel L. López & Patrick Rey, 2016. "Foreclosing Competition Through High Access Charges and Price Discrimination," Journal of Industrial Economics, Wiley Blackwell, vol. 64(3), pages 436-465, September.

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    More about this item

    Keywords

    Income effects; Network competition; Profit neutrality; Second-degree price discrimination; Termination-based discrimination;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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