Service provision on a network with endogenous consumption capacity

We present a model in which the consumers' capacity to access a service provided on a network depends negatively on the price charged by the network owner per capacity unit. Several scenarios concerning the structure of the downstream service provision market are studied. First, a monopolist operates in both the network and the service provision stage. Second, we assume duopolistic competition between the network owner and the entrant. Third, we allow for endogenous differentiation of the services provided by the two competitors. Generally speaking, the duopolistic structure does not necessarily enhance consumer surplus. Furthermore, competition in the service provision market may reduce social welfare, either due to excessive differentiation or due to a low network density.