On the Economics of Network Interconnections and Net Neutrality

Abstract

The Internet of symmetric traffic flows between networks and a hierarchical topology, has long given way to one with a significantly asymmteric traffic flows and a flatter topology. The Internet topology of today may be characterised as having three key types of networks—content providers, user access providers, and transit providers. Further, in this Internet, best-effort routing of centrally stored content using distributed protocols has been seen to be inadequate to provide a suitably reliable transport service to provide the requisite quality of service to the end user. Two important developments to mitigate this gap in the capability of the Internet and the needs of modern content are the following. (1) Proliferation of content distribution networks (2) direct peering between content networks and ISPs. In this paper we analyze the economics of such interconnections. Using microeconomic models from industrial organization literature, we first develop the conditions for a content provider to connect directly to a service provider. Further, when such a direct link is indeed sought, we analyze the quality of the link vis-a-vis the default option of using a transit service. We then analyze the content provider market coverage by the content distribution networks. Finally, we discuss the implications of these results on the objectives sought by net neutrality regimes.