Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society

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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

A Study on Internet Interconnection: Peering and the Investment of Network Capacity

Vol.15, No.4, December , 55–90

English Version |  Korean Version
  •   (Sogang University)


This study analysed the peering contracts, which have been a main method of internet interconnection among internet service providers (ISP) since mid 1990. In duopoly model, if ISP firms interconnect without network capacity commitment, ISP firms would choose less network capacity under peering contract than not peering irrespectively of market size and the important value of interconnection. On the other hand, when two ISP firms cooperatively choose the network capacity with commitment and market size is sufficiently large, we proposed ISP firms would choose the more network capacity under peering contract than not peering. We show that if market size is enough large, peering contracting can be Nash Equilibrium irrespective of commitment about network capacity. In other words, each ISP firms have the incentive of peering contract in equilibrium. But it would be Nash Equilibrium that two ISP firms would not peer with each other having the fixed cost on peering. We showed it would be socially dominant equilibrium that two ISP firms would peer with each other under commitment on network capacity choice. A policy making point of view, we propose the regulation of government on internet service industry should include internet peering between ISP firms. In other words, the peering contract between similar sized ISP firms should be institutionally guaranteed by regulation government. Also, we showed that social welfare would be larger under cooperative regime than noncooperative regime on choosing network capacity. Therefore, regulation government must carefully think about the importance of cooperation selecting network capacity, but regulation about ISP industry should be restricted within merger and acquisition which is said to be the regulation about final commodity.

   Internet Interconnection, Peering, Network Capacity, Network Externality

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