Network Connection and Disconnection

Abstract

When two networks interconnect, one network may value the connection more than the other. In an unregulated environment, the direction of payment for interconnection depends on whether there are increasing or decreasing marginal returns to network size. If users face decreasing marginal returns to network size, a small network benefits more from interconnection than a large network. Assuming that pricing between networks reflects this asymmetry, large networks can charge smaller ones for interconnection. Network mergers can result in higher interconnection fees for non-merging networks. Conditions for disconnection are examined. Despite the increasing value of network size, a large network may disconnect, either to recruit members of the disconnected network or, surprisingly, to shrink aggregate network size. Shrinkage benefits the large network in bargaining with surviving networks.