Internet Interconnection and the Off-Net-Cost Pricing Principle

Posted: 21 Jul 2003  

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

J. Scott Marcus

Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste (WIK)

Rey Patrick

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)

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Abstract

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

Laffont, Jean-Jacques and Marcus, J. Scott and Patrick, Rey 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

Jean-Jacques Laffont

University of Southern California - Department of Economics (Deceased)

No Address Available

J. Scott Marcus

Wissenschaftliches Institut für Infrastruktur und Kommunikationsdienste (WIK) ( email )

Rhöndorfer Str. 68
53604 Bad Honnef, 53604
Germany

Patrick Rey (Contact Author)

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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