Peering and Settlement in the Internet: An Economic Analysis
This paper explores the implications of Internet peering in the context of a model of competing, vertically integrated Internet Access Providers. We show that if regulation forbids settlement payments between firms, there will be under-investment in capacity and under-pricing of usage, both of which lead to excessive congestion. To overcome these problems, firms that are net providers of Internet infrastructure should be allowed to charge firms that are net users. We characterize the efficient level of these access payments, assuming usage can be appropriately measured. We find that refusal to peer and the charging of settlement payments may well be efficiency enhancing. Copyright 2000 by Kluwer Academic Publishers
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