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1629 Interconnection and Prioritization Pio Baake, Slobodan Sudaric 2016 30 S.

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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.

JEL-Classification:

L13;L51;L96

Keywords:

interconnection, investment, network neutrality, prioritization