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Internet Interconnection and the Off-Net-Cost Pricing Principle

35 Pages Posted: 4 Nov 2002  

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

J. Scott Marcus

Bruegel; European University Institute - Florence School of Regulation

Patrick Rey

Toulouse School of Economics; Centre for Economic Policy Research (CEPR)

Jean Tirole

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)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2002

Abstract

The paper develops 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. The paper analyzes 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. The paper then compares the socially optimal access charge with the privately desirable one. Finally, when websites charge micropayments, or when websites 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.

Keywords: Internet, Networks, Interconnection, Competition Policy

JEL Classification: D4, K21, L41, L43, L51, L96

Suggested Citation

Laffont, Jean-Jacques and Marcus, J. Scott and Rey, Patrick and Tirole, Jean, Internet Interconnection and the Off-Net-Cost Pricing Principle (August 2002). USC CLEO Research Paper No. C02-24. Available at SSRN: https://ssrn.com/abstract=340620 or http://dx.doi.org/10.2139/ssrn.340620

Jean-Jacques Laffont (Contact Author)

University of Southern California - Department of Economics (Deceased)

No Address Available

J. Scott Marcus

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

European University Institute - Florence School of Regulation ( email )

Florence
Italy

Patrick Rey

Toulouse School of Economics ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Place Anatole France
21 Allees de Brienne
F-31042 Toulouse Cedex
France
+33 5 61 12 8642 (Phone)
+33 5 61 12 8637 (Fax)

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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