Abstract
This paper analyzes the strong network externalities associated with Internet services from a competition policy perspective. In the market for Internet services, network effects are so important that an ISP needs to be able to offer universal connectivity in order to survive in this market. To reach universal con- nectivity, new entrants to the Internet interconnectivity market need to establish a direct or indirect transit agreement with at least one Tier-1 ISP. The fear that a single Tier-1 ISP could abuse a dominant market position in a transit agreement with lower level ISPs is not substantiated by the analysis. Competitive forces in the market for top-tier Internet interconnectivity are strong. A collusion between Tier-1 ISPs to collectively raise prices in the transit market is also not likely to be stable because the prerequisites for a stable collusion are not fulfilled in the market for top-tier Internet interconnectivity services. The analysis supports the view that competitive forces in the transit market are working and can effec- tively hinder Tier-1 ISPs from discriminating ISPs that are on lower levels of the Internet hierarchy.
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