"Interconnection and Competition among Asymmetric Networks in the Internet Backbone" by Eric Jahn and Jens Prüfer The internet has become a global medium of data exchange. At the core it comprises a number of backbone networks. For e-commerce, Voice over IP or Video-on-Demand services to meet customer expectations, internet backbone providers must offer world-wide connectivity, meaning that they have to enter into contracts with each other to interconnect their backbones. A variety of interconnection regimes are encountered in practice. The specific regime of interconnection, i.e. the contractual rights and duties of the providers involved, influences competition for end-users, and vice versa. In their paper "Interconnection and Competition among Asymmetric Networks in the Internet Backbone", Eric Jahn and Jens Prüfer examine this interrelation between interconnection and competition in the internet backbone market by making use of a simple game-theoretic model explaining how networks with asymmetric sizes choose among different interconnection regimes and compete for end-users. More>>

The internet has become a global medium of data exchange. At the core it comprises a number of backbone networks. For e-commerce, Voice over IP or Video-on-Demand services to meet customer expectations, internet backbone providers must offer world-wide connectivity, meaning that they have to enter into contracts with each other to interconnect their backbones. A variety of interconnection regimes are encountered in practice. The specific regime of interconnection, i.e. the contractual rights and duties of the providers involved, influences competition for end-users, and vice versa. In their paper "Interconnection and Competition among Asymmetric Networks in the Internet Backbone", Eric Jahn and Jens Prüfer examine this interrelation between interconnection and competition in the internet backbone market by making use of a simple game-theoretic model explaining how networks with asymmetric sizes choose among different interconnection regimes and compete for end-users. The paper shows that a direct interconnection regime (peering) softens competition compared to indirect interconnection since asymmetries become less influential when networks peer. Sufficiently symmetric networks enter into a peering agreement while others use an intermediary network for exchanging traffic. These findings confirm to the regulatory approaches taken by non-US policymakers. In contrast, US policymakers prefer peering agreements among relatively asymmetric networks.
The main practical implications of the model both for networks, consumers, and policy makers inside and outside the US are the following:
1. If, besides Intermediary and Bill-and-Keep, networks also consider Paid Peering as a possible type of interconnection, we expect to observe more Paid Peering in the future. This would translate to more Peering agreements in general which, in turn, would lead to higher profits of networks.
2. This development would harm consumer surplus because of higher average prices for end-users.
3. Since the emergence of Paid Peering also lowers demand for IP-Transit, top level backbones can be expected to lose revenues.
4. As all top level backbones are US-based, non-US policy makers do not include profits from IP-Transit in their calculations. Instead of considering to punish large networks who refuse (Bill-and-Keep) Peering to smaller ones, these policy makers should consider to restrict Peering because networks do not care about the fact that fiercer competition under Intermediary benefits consumers, and peer excessively instead. In contrast, since US-based policy makers do account for profits from IP-Transit, they should favour Peerings among networks sufficiently asymmetric in size. Hence, they should seek to discourage large networks from refusing to peer with smaller ones. These implications could also be applied to a telecommunications market which was both unregulated in terms of inter-carrier compensation fees and not subject to price discrimination regarding destinations of calls.