Network Competition with Income Effects

I generalize the workhorse model of network competition to include income effects in call demand. Empirical work has shown call demand to increase significantly with income. For any positive income effect, network operators prefer a termination rate above marginal cost if networks are sufficiently differentiated. This holds with or without call price discrimination. Under price discrimination, the networks charge a lower price for calls within the own network (on-net) than to other networks (off-net). Income effects thus deliver theoretical results consistent with stylized facts about call prices and in line with regulatory concern about excessive termination rates.