Handbook on the Economics of the Internet
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Handbook on the Economics of the Internet

Edited by Johannes M. Bauer and Michael Latzer

As the single most important general purpose technology of recent times, the Internet is transforming the organization, competitive structure and business models of the private, the public and non-profit sectors. In 27 original chapters, leading authors discuss theoretical and applied frameworks for the study of the economics of the Internet and its unique economics as a global information and communications infrastructure. They also examine the effects of the Internet on economic transactions (including social production, advertising, innovation, and intellectual property rights), the economics and management of Internet-based industries (including search, news, entertainment, culture, and virtual worlds), and the effects of the Internet on the economy at large.
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Chapter 16: Interconnection in the Internet: peering, interoperability and content delivery

David D. Clark, William H. Lehr and Steven Bauer


The Internet is a network of networks that realizes its global reach by being able to route data from source nodes on one network to destination nodes that may be across town or on the other side of the globe, and in many cases, are on networks that are owned and operated by different Internet service providers (ISPs). Along the end-to-end path, the data may need to cross the networks of still other ISPs. Supporting the end-to-end, global connectivity, which is a hallmark of the Internet’s value proposition, requires that the ISPs be interconnected both physically (i.e., there exists an electronic pathway for transporting packets) and via business relationships. These business relationships impact both the flow of traffic and the flow of money across the Internet value chain. Historically, most traffic was exchanged between the largest ISPs on the basis of revenue-neutral peering agreements that routed traffic but not dollars across ISP interconnections. The explosive growth of video traffic, the increased socio-economic importance of the Internet, and the rise of business disputes over who should pay for the increased costs of traffic have raised questions about whether the time has now come for Internet interconnection to be regulated. In this chapter, we focus on the growing challenge posed by the rise in traffic/usage-related costs for Internet interconnection – attributable today to the rise in entertainment video traffic from content delivery networks (CDNs) – and what this may mean for policy-makers.

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