Dynamic Bargaining and Size Effects in the Broadband Industry

Abstract

I estimate a model of dynamic bargaining between internet service providers (ISPs) and Netflix over interconnection fees and use it to evaluate counterfactual ISP mergers. I show that the size of the downstream consumer market an ISP serves is much more important than its disagreement point for determining bargaining outcomes with Netflix. I evaluate several mergers between ISPs serving non-overlapping markets and find that smaller ISP mergers would lengthen negotiations and reduce Netflix's share of the bargaining surplus, while larger mergers would have no significant effect.

Keywords: Mergers, Broadband Internet, Bargaining

JEL Classification: L41, L96, C73