Internet services - more capacity is needed to serve the greater demand for transmission services that results. 1. Substitutes and Network Capacity A greater variety of network services increases the demand for network capacity. Consumers have a higher willingness to pay for services that most closely match their desired combination of product features than for more distant substitute services. If a single network can provide a variety of services, then more services will usually increase demand. If distinct networks are needed to increase product variety, then multiple networks will have a greater total demand for capacity than would a single network with less product variety. We now consider how the number of substitute services affects demand for capacity. Suppose that the set of products is described by a circle of unit circumfer- ence. Suppose that there are m types of services and that these are located evenly around the circle. This is represented in Figure 3.16. Consumers have different preferences over product features. Suppose that the most preferred products of consumers are uniformly distributed around the circle with unit density. A consumer's willingness to pay for Q units of a product at a distance r from the consumer's most preferred product is U=u(Q)-trQ, where t is a taste parameter. The taste parameter is analogous to transport cost in the Hotelling location model. If products are all priced at the same price p, the consumer chooses the product closest to that consumer's most preferred type of product. The demand of a consumer at distance r from the nearest available product maximizes net benefits u( (Q) - tr Q - pQ. Thus, the consumer's demand solves ((Q) - tr = p. Let Q*(p+tr) be the consumer's demand for network capacity. Clearly demand is downward sloping in price p and in distance r. Networks in Telecommunications Figure 3.16. The product space is a circle of unit circumference with m substitute services. If there are m substitute products all at the same price, total demand for capa- city