Margit Vanberg, Conclusions in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 132 - 133

A Network Economic Analysis

1. Edition 2009, ISBN print: 978-3-8329-4163-5, ISBN online: 978-3-8452-1290-6

Series: Freiburger Studien zur Netzökonomie, vol. 14

Bibliographic information
132 in the context of Internet transport services. Businesses offering content and information on the Internet care very much about the costs their targeted customers face for reaching this content. The costs of being reached are a significant factor in their decision where to place their content on the Internet. The access charge is therefore not only indirectly but also directly a strategic element in the competition over endusers. Decisive for the stability of any collusion are the level of the access charge and the substitutability of the network offers. Between Tier-1 ISPs the access charge is generally set to the level of zero. It therefore corresponds to the prerequisite that is should not be too far above marginal costs of termination. However, for collusive purposes a termination fee would need to be introduced where there was none before. This may be more difficult than an incremental increase of an existing termination charge. Furthermore, the degree of substitutability between the transit offers of Tier-1 ISPs can be considered to be very high. This fact makes collusion interesting, but at the same time it represents a high risk of instability of any collusion because any of the Tier-1 ISPs could hope to increase its market share by offering a lower transit charge than its competitors. Lastly, consider the price structures in the market for transit services provided by Tier-1 ISPs. Transit prices generally are not differentiated according to the destination network. However, non-linear prices for transit services are the norm in the transit market. In general, a transit taker will pay a fixed fee that depends on the bandwidth by which the two networks are connected plus a variable fee for traffic exceeding a previously defined threshold. The ability to compete in two-part tariffs is a further hindrance to stable collusion in the transit market. To summarize, the prerequisites for a stable collusion are not fulfilled in the market for Tier-1 backbone services. 7.5 Conclusions The purpose of this chapter was to review the competition policy analyses that were conducted for the market for Internet service provision in order to determine whether the disaggregated analysis of the market for Internet service provision captured all relevant aspects of competition in Internet service provision which should be included in a comprehensive examination of the question whether sector-specific regulation is justified in this market. In the market for Internet services, network effects are so important that an ISP needs to be able to offer universal connectivity in order to survive in this market. The demand for universal connectivity on the logical layer is a derived demand from the demand for universal connectivity on the applications layer. To reach universal connectivity, new entrants to the Internet backbone services market will need to establish a direct or indirect transit agreement with at least one Tier-1 ISP. In their merger policy analyses conducted for this market, competition authorities feared that a merger between two of the large Tier-1 133 ISPs would put the resulting firm in a position in which it could charge discriminatory rates for its transit services. The above analysis shows that Tier-1 ISPs enter into peering agreements only when the benefits from the interconnection are roughly similar to both parties. The fear that a single Tier-1 ISP could be able to abuse a dominant market position in a transit agreement with lower-level ISPs cannot be substantiated when the strong competitive forces in the market for top-tier Internet backbone services are taken into account. Tier-1 ISPs compete with product differentiation tactics. Furthermore, customers frequently multi-home and can relatively conveniently switch their home network. As a result, Tier-1 ISPs cannot benefit from refusing to interconnect respectively from deteriorating interconnection quality with lower-level networks. In principle, some market constellations are conducive to collusion on the retail level, stabilized via cooperation on the wholesale level. A collusion between Tier-1 ISPs, to collectively raise prices in the transit market, is not likely to be stable because the prerequisites for a stable collusion are not fulfilled in the market for toptier Internet backbone services. Most importantly, the assumption of a termination monopoly is not fulfilled. To summarize, the review of the competition policy analyses conducted for the market for Internet service provision has provided strong support that competitive forces in the transit market are working and can effectively hinder Tier-1 ISPs from discriminating ISPs on lower levels of the Internet hierarchy. The competition policy analyses of the market for Internet service provision, which were initially triggered by the merger of MCI and Worldcom in 1998, disclose no stable market power in Internet service provision which could justify sector-specific regulation in this market. The review of these analyses has further shown that the model that was prominently used in the context of the merger proceedings in the Internet backbone services market neglects important aspects of competition and cooperation among ISPs. Of course, this model was employed only as a basis for antitrust decisions and not to justify sector-specific regulations in Internet service provision. Nevertheless, also for general competition policy application it is important to have a good understanding of the complex nature of competition in network sectors.

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Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.