Congestion, Private Peering and Capacity Investment on the Internet
This 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.
|Date of creation:||12 Dec 2002|
|Date of revision:||08 Apr 2003|
|Note:||Type of Document - LaTex; prepared on PC-TEX; to print on HP;|
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- Stanley Besen, 2001. "Advances in Routing Technologies and Internet Peering Agreements," American Economic Review, American Economic Association, vol. 91(2), pages 292-296, May.
- Jean-Jacques Laffont, 2001. "Internet Peering," American Economic Review, American Economic Association, vol. 91(2), pages 287-291, May.
- Lee McKnight & Joseph P. Bailey, 1997. "Global Internet Economics," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
- R. Gibbens & R. Mason & Richard Steinberg, 2000. "Internet service classes under competition," LSE Research Online Documents on Economics 23577, London School of Economics and Political Science, LSE Library.
- Pio Baake & Kay Mitusch, 2004.
"Competition with Congestible Networks,"
Discussion Papers of DIW Berlin
402, DIW Berlin, German Institute for Economic Research.
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