Posted: 21 Jul 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.
Suggested Citation: Suggested Citation
Laffont, Jean-Jacques and Marcus, J. Scott and Rey, Patrick and Tirole, Jean, Internet Interconnection and the Off-Net-Cost Pricing Principle. RAND Journal of Economics, Vol. 34, No. 2, Summer 2003. Available at SSRN: https://ssrn.com/abstract=406696