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Interconnection and Prioritization

Discussion Papers 1629, 30 S.

Pio Baake, Slobodan Sudaric


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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.

Pio Baake

Research Director Regulation in the Firms and Markets Department

JEL-Classification: L13;L51;L96
Keywords: interconnection, investment, network neutrality, prioritization
Frei zugängliche Version: (econstor)