Congestion, Private Peering and Capacity Investment on the Internet

Fabio Maria Manenti ()

Industrial Organization from EconWPA

Abstract: 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.

Keywords: Internet; peering; congestion; QoS; capacity investment; interconnection (search for similar items in EconPapers)
JEL-codes: D4 K21 L41 L51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-law and nep-net
Date: 2002-12-12, Revised 2003-04-08
Note: Type of Document - LaTex; prepared on PC-TEX; to print on HP;
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpio:0212003

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