Network Competition with Income Effects

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.