An Economic Analysis of Interconnection Arrangements Between Internet Backbone Providers

Transit and peering arrangements among Internet backbone providers (IBPs) are essential for the global delivery of communication services on the Internet. In addition, to support delay-sensitive applications (e.g., streaming and multimedia applications) it is important for IBPs to maintain high service quality even if the network is congested. One promising approach is to establish interconnection agreements among providers to dynamically trade network capacity. To make such interconnections possible in a competitive setting, we propose a pricing scheme that considers factors such as network utilization, link capacity, and the cost structure of the interconnecting participants. Our analyses show that the common sender keeps all (SKA) mode of settlement does not provide adequate incentives for collaboration; rather, the provider that delivers the packets should be suitably compensated at an equilibrium price. Two price equilibria are identified: The first favors slower IBPs, whereas the other is congestion based and can be more beneficial for faster IBPs. When cost asymmetries exist, the lower cost IBP needs to offer a price discount to induce participation. We show that a usage-based, utilization-adjusted interconnection agreement could align the costs and revenues of the providers while allowing them to meet more stringent quality of service requirements.