Network Competition: Workhorse Resurrection

Abstract

I generalize the workhorse model of network competition (Armstrong, 1998; Laffont, Rey and Tirole, 1998a,b) to include income effects in call demand. Income effects imply that call demand depends also on the subscription fee, not only on the call price. In the standard case of differentiated networks, weak income effects are enough to deliver results in line with stylized facts: The networks have an incentive to agree on high mobile termination rates to soften competition. They charge a higher price for calls outside (off-net) than inside (on-net) the network. This vindicates the use of (a perturbation of) the workhorse model of network competition.