Pricing and Efficiency in the Market for IP Addresses
Benjamin G. Edelman
Harvard University - HBS Negotiations, Organizations and Markets Unit
Yahoo! Research Labs; National Bureau of Economic Research (NBER)
June 9, 2013
Harvard Business School NOM Unit Working Paper No. 12-020
We consider market rules for the transfer of IP addresses, numeric identifiers required by all computers connected to the Internet. Excessive fragmentation of IP address blocks causes growth in the Internet's routing table, which is socially costly, so an IP address market should discourage subdividing IP address blocks more than necessary. Yet IP address transfer rules also need to facilitate purchase by the networks that need the addresses most, from the networks that value them least. We propose a market rule that avoids excessive fragmentation while almost achieving social efficiency, and we argue that implementation of this rule is feasible despite the limited powers of central authorities. We also offer a framework for the price trajectory of IP addresses. In a world without uncertainty, the unit price of IP addresses is constant until all addresses are in use and begins to decrease at that time. With uncertainty, the price before that time is a martingale, and the price trajectory afterwards is a supermartingale. Finally, we explore the role of rental markets in sharing information about address value and assuring allocative efficiency.
Number of Pages in PDF File: 26working papers series
Date posted: September 27, 2011 ; Last revised: June 10, 2013
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