Internet Interconnection and the Off-Net-Cost Pricing Principle
University of Southern California - Department of Economics (Deceased)
J. Scott Marcus
European University Institute - Florence School of Regulation; Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste (WIK)
University of Toulouse 1 - Toulouse School of Economics (TSE); Centre for Economic Policy Research (CEPR)
University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)
RAND Journal of Economics, Vol. 34, No. 2, Summer 2003
We develop a framework for Internet backbone competition. In the absence of direct payments between websites and consumers, the access charge allocates communication costs between websites and consumers and affects the volume of traffic. We analyze the impact of the access charge on competitive strategies in an unregulated retail environment. In a remarkably broad range of environments, operators set prices for their customers as if their customers' traffic were entirely off-net. We then compare the socially optimal access charge with the privately desirable one. Finally, when websites charge micropayments, or sell goods and services, the impact of the access charge on welfare is reduced; in particular, the access charge is neutral in a range of circumstances.
Accepted Paper Series
Date posted: July 21, 2003
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