Paid Peering and Investment Incentives for Network Capacity and Content Diversity

Abstract

This paper analyzes the effects of direct interconnection agreements in the Internet backbone on content quality investment for content providers (CPs). The model assumes that when the Internet service provider (ISP) has a vertical affiliation with one CP, the ISP directly interconnects the affiliated CP’s traffic to its network for free while collecting a direct interconnection fee from the unaffiliated CP. If the unaffiliated CP’s traffic is indirectly interconnected to the ISP’s network via a third party transit provider, its network quality is lower than that via a direct interconnection. For the CPs’ content quality investments, I find that the affiliated CP invests more in content when the rival indirectly interconnects, leading to a higher total level of content investment. Accordingly, there is a condition under which the ISP does not want to offer direct interconnection to the unaffiliated CP. However, consumers are not always worse off from this interconnection foreclosure. Thus, the regulation of a paid direct interconnection does not necessarily enhance welfare in terms of consumer surplus.