Diversification, Market Entry, and the Global Internet Backbone

66 Pages Posted: 21 Jun 2023 Last revised: 31 Mar 2024

See all articles by El Hadi Caoui

El Hadi Caoui

Rotman School of Management; University of Toronto at Mississauga - Department of Management

Andrew Steck

University of Toronto

Date Written: November 3, 2023

Abstract

In many industries, buyers diversify their supplier base to manage supplier disruption risk. We investigate the importance of such diversification as a determinant of demand and supplier entry in the context of the internet backbone, the worldwide network of undersea fiber-optic cables that underpins the internet. We specify a model of inter-regional bandwidth demand and cable operators' dynamic entry and supply choices. The model is estimated using novel data on cross-border data flows, prices, and cable characteristics. Counterfactual analysis reveals that supplier diversification accounts for a large share of entry and surplus created between 2005 and 2021. Relative to the socially optimal level of entry, distortions due to suppliers' inability to capture fully the social benefits of diversity are as large as distortions due to business stealing.

Keywords: network diversity, internet backbone, entry, dynamic games, undersea cables

JEL Classification: L13, L96, L86

Suggested Citation

Caoui, El Hadi and Caoui, El Hadi and Steck, Andrew, Diversification, Market Entry, and the Global Internet Backbone (November 3, 2023). Available at SSRN: https://ssrn.com/abstract=4478868 or http://dx.doi.org/10.2139/ssrn.4478868

El Hadi Caoui

Rotman School of Management ( email )

Canada

University of Toronto at Mississauga - Department of Management ( email )


Canada

Andrew Steck (Contact Author)

University of Toronto

105 St George Street
Toronto, M5S 3G8
Canada

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