Interconnection and Prioritization
32 Pages Posted: 10 Jan 2017
Date Written: December 2016
Abstract
We analyze pricing and competition under paid prioritization within a model of interconnected internet service providers (ISPs), heterogeneous content providers (CPs) and heterogeneous consumers. We show that prioritization is welfare superior to a regime without prioritization (network neutrality) and yields higher incentives for investment in network capacities. As ISPs price discriminate between on-net and off-net CPs, their bottleneck property is propagated and competition for consumers increases resulting in a potential prisoner's dilemma when deciding whether to offer prioritization. We show that peering for prioritized traffic emerges as a collusive outcome and present off-net prices as a further collusive instrument.
Keywords: interconnection, investment, network neutrality, prioritization
JEL Classification: L13, L51, L96
Suggested Citation: Suggested Citation