On the Economics of Network Interconnections and its Impact on Net Neutrality

The Internet of symmetric traffic flows between networks and a hierarchical topology, has long given way to one with significantly asymmetric traffic flows and a flatter topology. The Internet topology of today may be characterized as having three key types of networks—content providers, user access providers, and transit providers. In this Internet, best-effort routing of centrally stored content using distributed protocols has been seen to be inadequate to provide a suitably reliable transport service with the requisite quality of service to the end user. Two important developments that mitigate this gap in the capability of the traditional Internet and the needs of modern content are (i) direct peering arrangements between content networks and ISPs, and (ii) widespread use of content distribution networks (CDNs), who also peer with ISPs. In this paper we first analyze the economics of such peering arrangements. Using microeconomic models from the industrial organization literature, we first develop the conditions for a content provider to connect directly to a service provider, possibly via a peering link. Further, when such a direct link is indeed sought, we analyze the quality of the link vis-a-vis the default option of using a transit service. We then extend our results to the case of CDN, and analyze the content provider market coverage by CDNs. Finally, we discuss the implications of these results on the objectives sought by net neutrality regimes.