Congestion, Private Peering and Capacity Investment on the Internet
AbstractThis paper presents a model of private bilateral and multilateral peering arrangements between Internet backbone providers when the network is congested. We study how different forms of interconnection and the competitive conditions of the market affect backbones' investments in network and peering point capacities. We show that network and peering point capacities are equilibrium complements; increasing competition reduces capacity investments (under-investment), thus worsening the quality of service both with multilateral and bilateral peering; under bilateral peering the inefficiency is less severe. Because of under-investment, welfare may be lower when the market is more competitive. We also show that asymmetries between backbones, which can take the form of uneven content distribution or product differentiation, may reduce under-investment and improve the quality of service. The introduction of an "inverse capacity interconnection fee" where providers pay each other a fee which is negatively correlated with their installed capacity may play the role of a coordinating mechanism towards a Pareto superior outcome.
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Bibliographic InfoPaper provided by EconWPA in its series Industrial Organization with number 0212003.
Date of creation: 12 Dec 2002
Date of revision: 08 Apr 2003
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Internet; peering; congestion; QoS; capacity investment; interconnection;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
- L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-12-17 (All new papers)
- NEP-COM-2002-12-17 (Industrial Competition)
- NEP-LAW-2002-12-17 (Law & Economics)
- NEP-NET-2002-12-17 (Network Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Theory workshop papers
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- Laffont, Jean-Jacques & Marcus, Scott & Rey, Patrick & Tirole, Jean, 2001. "Internet Interconnection and the Off-Net-Cost Pricing Principle," IDEI Working Papers 130, Institut d'Économie Industrielle (IDEI), Toulouse.
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- Jean-Jacques Laffont, 2001. "Internet Peering," American Economic Review, American Economic Association, vol. 91(2), pages 287-291, May.
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