Direct Interconnection and Investment Incentives for Content Quality

Soo Jin Kim 1
  • 1 School of Entrepreneurship and Management, ShanghaiTech University, Room 436, 393 Middle Huaxia Road, Shanghai, China
Soo Jin Kim
  • Corresponding author
  • School of Entrepreneurship and Management, ShanghaiTech University, Room 436, 393 Middle Huaxia Road, Shanghai, China
  • Email
  • Search for other articles:
  • degruyter.comGoogle Scholar

Abstract

This paper analyzes the effects of direct interconnection agreements in the Internet backbone on content quality investment for content providers (CPs). The model assumes that when the Internet service provider (ISP) has a vertical affiliation with one CP, the ISP directly interconnects the affiliated CP’s traffic to its network for free while collecting a direct interconnection fee from the unaffiliated CP. If the unaffiliated CP’s traffic is indirectly interconnected to the ISP’s network via a third party transit provider, its network quality is lower than that via a direct interconnection. For the CPs’ content quality investments, I find that the affiliated CP invests more in content when the rival indirectly interconnects, leading to a higher total level of content investment. Accordingly, there is a condition under which the ISP does not want to offer direct interconnection to the unaffiliated CP. However, consumers are not always worse off from this interconnection foreclosure. Thus, the regulation of a paid direct interconnection does not necessarily enhance welfare in terms of consumer surplus.

  • Ahmed, A., Z. Shafiq, H. Bedi, and A. Khakpour. 2017. “Peering vs. Transit: Performance Comparison of Peering and Transit Interconnections.” 2017 IEEE 25th International Conference on Network Protocols (ICNP).

  • Armstrong, M. 1998. “Network Interconnection in Telecommunications.” The Economic Journal 108 (448): 545–64, https://doi.org/10.1111/1468-0297.00304.

    • Crossref
    • Export Citation
  • Baake, P., and S. Sudaric. 2016. Interconnection and Prioritization. DIW Berlin Discussion Paper, No. 1629.

  • Baake, P., and S. Sudaric. 2019. “Net Neutrality and CDN Intermediation.” Information Economics and Policy 46: 55–67, https://doi.org/10.1016/j.infoecopol.2019.01.003.

    • Crossref
    • Export Citation
  • Baake, P., and T. Wichmann. 1999. “On the Economics of Internet Peering.” Netnomics 1: 89–105, https://doi.org/10.1023/A:1011449721395.

    • Crossref
    • Export Citation
  • Baranes, E., and C. H. Vuong. 2020. Investment in Quality Upgrade and Regulation of the Internet. CESifo Working Paper, No. 8074.

  • Bourreau, M., and R. Lestage. 2019. “Net Neutrality and Asymmetric Platform Competition.” Journal of Regulatory Economics 55: 140–71, https://doi.org/10.1007/s11149-019-09380-1.

    • Crossref
    • Export Citation
  • Bourreau, M., F. Kourandi, and T. Valletti. 2015. “Net Neutrality with Competing Internet Platforms.” The Journal of Industrial Economics 63 (1): 30–73, https://doi.org/10.1111/joie.12068.

    • Crossref
    • Export Citation
  • Brito, D., P. Pereiraz, and J. Vareda. 2014. “On the Incentives of an Integrated ISP to Favor its Own Content.” In 20th ITS Biennial Conference, Rio de Janeiro 2014: The Net and the Internet Emerging Markets and Policies 106901: International Telecommunications Society (ITS).

  • Broos, S., and A. Gautier. 2017. “The Exclusion of Competing One-way Essential Complements: Implications for Net Neutrality.” International Journal of Industrial Organization 52: 358–92. https://doi.org/10.1016/j.ijinadorg.2017.03.003.

    • Crossref
    • Export Citation
  • Burguet, R., R. Caminal, and M. Ellman. 2015. “In Google we Trust?.” International Journal of Industrial Organization 39: 44–55, https://doi.org/10.1016/j.ijindorg.2015.02.003.

    • Crossref
    • Export Citation
  • Carter, M., and J. Wright. 1999. “Bargaining over Interconnection: The Clear-Telecom Dispute.” The Economic Record 75 (3): 241–55, https://doi.org/10.1111/j.1475-4932.1999.tb02453.x.

    • Crossref
    • Export Citation
  • Cheng, H. K., S. Bandyopadhyay, and H. Guo. 2010. “The Debate on Net Neutrality: A Policy Perspective.” Information Systems Research 22 (1), https://doi.org/10.1287/isre.1090.0257.

  • Choi, J. P., and B. C. Kim. 2010. “Net Neutrality and Investment Incentives.” RAND Journal of Economics 41 (3): 446–71, https://doi.org/10.1111/j.1756-2171.2010.00107.x.

    • Crossref
    • Export Citation
  • Choi, J. P., D. S. Jeon, and B. C. Kim. 2015. “Net Neutrality, Business Models, and Internet Interconnection.” American Economic Journal: Microeconomics 7 (3): 104–41, https://doi.org/10.1257/mic.20130162.

  • Choi, J. P., D. S. Jeon, and B. C. Kim. 2018. “Net Neutrality, Network Capacity, and Innovation at the Edges.” The Journal of Industrial Economics 66 (1), https://doi.org/10.1111/joie.12161.

  • D’Annunzio, A., and P. Reverberi. 2016. “Co-investment in Ultra-fast Broadband Access Networks: Is There a Role for Content Providers?.” Telecommunications Policy 40 (4): 353–67, https://doi.org/10.1016/j.telpol.2015.11.012.

    • Crossref
    • Export Citation
  • D’Annunzio, A., and A. Russo. 2015. “Net Neutrality and Internet Fragmentation: The Role of Online Advertising.” International Journal of Industrial Organization 43: 30–47, https://doi.org/10.1016/j.ijindorg.2015.07.009.

    • Crossref
    • Export Citation
  • de Cornière, A., and G. Tayler. 2014. “Integration and Search Engine Bias.” RAND Journal of Economics 45 (3): 576–97, https://doi.org/10.1111/1756-2171.12063.

    • Crossref
    • Export Citation
  • de Cornière, A., and G. Tayler. 2019. “A Model of Biased Intermediation.” RAND Journal of Economics 50 (4): 864–82, https://doi.org/10.1111/1756-2171.12298.

  • Dewenter, R., and J. Rösch. 2016. “Net Neutrality and the Incentives (Not) to Exclude Competitors.” Review of Economics 67, https://doi.org/10.1515/roe-2015-1010.

  • Economides, N. 2005. The Economics of the Internet Backbone. New York University Law and Economics Working Papers.

  • Economides, N., and B. Hermalin. 2012. “The Economics of Network Neutrality.” RAND Journal of Economics 43 (4), https://doi.org/10.1111/1756-2171.12001.

  • Economides, N., and J. Tåg. 2012. Network Neutrality on the Internet: A Two-sided Market Analysis: Information Economics and Policy, 91–104.

  • Frieden, R. 2014. “New Models and Conflicts in the Interconnection and Delivery of Internet-mediated Content.” Telecommunications Policy 38: 970–78, https://doi.org/10.1016/j.telpol.2014.04.004.

    • Crossref
    • Export Citation
  • Gans, J. S. 2015. “Weak versus Strong Net Neutrality.” Journal of Regulatory Economics 47: 183–200, https://doi.org/10.1007/s11149-014-9266-7.

    • Crossref
    • Export Citation
  • Gans, J. S., and M. Katz. 2016. Net Neutrality, Pricing Instruments and Incentives. NBER Working Paper, No. 22040.

  • Gilo, D., and Y. Spiegel. 2004. “Network Interconnection with Competitive Transit.” Information Economics and Policy 16: 439–58, https://doi.org/10.1016/j.infoecopol.2004.01.009.

    • Crossref
    • Export Citation
  • Giovannetti, E. 2002. “Interconnection, Differentiation and Bottlenecks in the Internet.” Information Economics and Policy 14: 385–04, https://doi.org/10.1016/s0167-6245(02)00048-3.

    • Crossref
    • Export Citation
  • Goetz, D. 2019. Dynamic Bargaining and Size Effects in the Broadband Industry. Working Paper.

  • Guo, H., and R. F. Easley. 2016. “Network Neutrality Versus Paid Prioritization: Analyzing the Impact on Content Innovation.” Production and Operations Management 25 (7): 1261–73, https://doi.org/10.1111/poms.12560.

    • Crossref
    • Export Citation
  • Guo, H., S. Bandyopadhyay, H. K. Cheng, and Y. C. Yang. 2010. “Net Neutrality and Vertical Integration of Content and Broadband Services.” Journal of Management Information Systems 27: 243–76 https://doi.org/10.2753/mis0742-1222270208.

    • Crossref
    • Export Citation
  • Hermalin, B., and M. L. Katz. 2001. Network Interconnection with Two-Sided User Benefits. University of California Working Paper.

  • Hermalin, B., and M. L. Katz. 2007. “The Economics of Product-line Restrictions with an Application to the Network Neutrality Debate.” Information Economics and Policy 19 (2): 215–48, https://doi.org/10.1016/j.infoecopol.2007.04.001.

    • Crossref
    • Export Citation
  • Höffler, F., and S. Kranz. 2011. “Legal Unbundling can be a Golden Mean between Vertical Integration and Ownership Separation.” International Journal of Industrial Organization 29: 576–88, https://doi.org/10.1016/j.ijindorg.2011.01.001.

    • Crossref
    • Export Citation
  • Jahn, E., and J. Prüfer. 2008. “Interconnection and Competition among Asymmetric Networks in the Internet Backbone Market.” Information Economics and Policy 20: 243–56, https://doi.org/10.1016/j.infoecopol.2008.03.002.

    • Crossref
    • Export Citation
  • Kourandi, F., J. Krämer, and T. Valletti. 2015. “Net Neutrality, Exclusivity Contracts, and Internet Fragmentation.” Information Systems Research 26 (2): 320–38, https://doi.org/10.1287/isre.2015.0567.

    • Crossref
    • Export Citation
  • Krämer, J., and L. Wiewiorra. 2009. Innovation through Discrimination!? A Formal Analysis of the Net Neutrality Debate. MPRA Paper, No. 16655.

  • Krämer, J., and L. Wiewiorra. 2012. “Network Neutrality and Congestion Sensitive Content Providers: Implications for Content Variety, Broadband Investment, and Regulation.” Information Systems Research 23 (4), https://doi.org/10.1287/isre.1120.0420.

  • Laffont, J., S. Marcus, P. Rey, and J. Tirole. 2001. “Interconnection and Access in Telecom and the Internet.” The American Economic Review 91 (2): 287–91, https://doi.org/10.1257/aer.91.2.287.

  • Laffont, J., S. Marcus, P. Rey, and J. Tirole. 2003. “Internet Interconnection and the Off-Net-Cost Pricing Principle.” The RAND Journal of Economics 34 (2): 370–90, https://doi.org/10.2307/1593723.

    • Crossref
    • Export Citation
  • Lee, R. S. 2013. “Vertical Integration and Exclusivity in Platform and Two-Sided Markets.” The American Economic Review 103 (7): 2960–3000, https://doi.org/10.1257/aer.103.7.2960.

    • Crossref
    • Export Citation
  • Little, I., and J. Wright. 2000. “Peering and Settlement in the Internet: An Economics Analysis.” Journal of Regulatory Economics 18 (2): 151–73. https://doi.org/10.1023/A:1008120618665.

    • Crossref
    • Export Citation
  • Mandy, D. M., and D. E. M. Sappington. 2007. “Incentives for Sabotage in Vertically Related Industries.” Journal of Regulatory Economics 31: 235–60, https://doi.org/10.1007/s11149-006-9015-7.

    • Crossref
    • Export Citation
  • Mendelson, H., and S. Shneorson. 2003. Internet Peering, Capacity and Pricing: Mimeo.

  • Njoroge, P., A. Ozdaglar, N. E. Stier-Moses, and G. Y. Weintraub. 2014. “Investment in Two-Sided Markets and the Net Neutrality Debate.” Review of Network Economics 12 (4), https://doi.org/10.1515/rne-2012-0017.

  • Peitz, M., and F. Schuett. 2016. “Net Neutrality and Inflation of Traffic.” International Journal of Industrial Organization 46: 16–62, https://doi.org/10.1016/j.ijindorg.2016.03.003.

    • Crossref
    • Export Citation
  • Pouyet, J., and T. Trégouët. 2016. Vertical Mergers in Platform Markets. CEPR Discussion Paper, No. DP11703.

  • Reggiani, C., and T. Valletti. 2016. “Net Neutrality and Innovation at the Core and at the Edge.” International Journal of Industrial Organization 45: 16–27, https://doi.org/10.1016/j.ijindorg.2015.12.005.

    • Crossref
    • Export Citation
Purchase article
Get instant unlimited access to the article.
$42.00
Log in
Already have access? Please log in.


or
Log in with your institution

Journal + Issues

Search