Investment and cooperation among Internet backbone firms

Internet traffic is carried over long distances on fiber-optic lines, commonly referred to as the Internet backbone. The efficient exchange of information on the Internet depends on the willingness of Internet backbone firms to connect with each other and exchange traffic, a practice known as interconnection. Policy makers and antitrust authorities have often expressed concern over increasing concentration and diminishing interconnection incentives in this industry. This dissertation examines interconnection and investment incentives in the Internet backbone industry, and provides a framework for analyzing the welfare effects of antitrust and regulatory policy intervention.;Chapter 2 develops a theoretical model of demand for Internet backbone access that includes network effects and investment. The model is used to identify the relationship between interconnection and investment incentives. Chapter 3 expands on this model and allows for congestion on network infrastructure. The model identifies market conditions under which a merger may lead to a sustainable dominant firm in the industry. A dominant-firm market structure may enhance welfare due to scale economies; however, less concentrated market structures can capture many of these efficiencies if firms commit to a high degree of interconnection. Finally, I analyze a new dataset on demand for Internet backbone access to identify current market conditions in the industry. My analysis suggests that both the MCI-WorldCom and proposed MCI WorldCom-Sprint mergers could have resulted in a sustainable dominant firm in the Internet backbone industry in the absence of government intervention.;Chapter 4 examines the relationship between interconnection and network reliability. Data on the purchasing behavior of IBP customers are used to illustrate that the customers' purchasing decisions are significantly influenced by factors other than network effects. An analytical model is developed in which customers are concerned about protecting against the loss of Internet access resulting from the failure of an IBP's network. The results suggest that IBPs can find interconnection desirable if interconnection enhances the reliability of their networks. Contrary to the existing literature, symmetric firms do not necessarily interconnect in this model.