Direct Interconnection and Investment Incentives for Network Capacity and Content Diversity
33 Pages Posted: 20 Nov 2016 Last revised: 27 Dec 2018
Date Written: December 24, 2018
This paper analyzes the effects of using a "paid direct interconnection'' agreement on partners' conflicting incentives to invest in Internet network quality and content diversity and its effects on social welfare. I find that an Internet service provider is more likely to invest in network capacity to improve delivery quality under a paid direct interconnection agreement. On the other hand, content providers tend to invest in content diversity under settlement-free peering regimes because of hold-up problems. Due to the conflicting effects of paid direct interconnection on investment incentives, the overall effect on social welfare is ambiguous and largely depends on the extent to which consumers value network quality and content diversity.
Keywords: Paid Peering, Interconnection, Net Neutrality, Two-Sided Market, Investment Incentives, Internet Service Provider, On-line Video Distributor (OVD)
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