We develop a model, in which Internet backbone providers decide on private peering agreements, comparing the benefits of private peering relative to being connected only through National Access Points. Backbone providers compete by setting capacities for their networks, capacities on the private peering links, if they choose to peer privately, and access prices. The model is formulated as a multistage game. We examine the model from two alternative modelling perspectives - a purely non-cooperative game, where we solve for Subgame Perfect Nash Equilibria through backward induction, and a network theoretic perspective, where we examine pairwise stable and efficient networks. While there are a large number of Subgame Perfect Nash Equilibria, both the pairwise stable and the efficient network are unique and the stable network is not efficient and vice versa. The stable network is the complete network, where all the backbone providers choose to peer with each other, while the efficient network is the one, where the backbone providers are connected to each other only through the National Access Points.
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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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References listed on IDEAS 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.:
Mackie-Mason, J.K. & Varian, H.R., 1993.
"Pricing the Internet,"
Memorandum
20/1993, Oslo University, Department of Economics.
Other versions:
Nicholas Economides, 1995.
"The Economics of Networks,"
Working Papers
94-24, New York University, Leonard N. Stern School of Business, Department of Economics, revised Sep 1995.
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