This project analyzes the network externalities present in the Internet and the effect these externalities have on the interconnection incentives of competing Internet Service Providers (ISPs). The Internet is a classical example for a market featuring significant positive network externalities. The utility of connecting to the Internet rises with the number of organizations and individuals connected to it. ISPs can internalize the positive external effects by network interconnection and by developing standards which make the applications provided on their networks compatible across network boundaries. The present analysis focused on the question whether the presence of network externalities in the market for Internet Services leads to inefficiencies in the compatibility choice of ISPs such that government intervention into interconnection between ISPs would be justified. Based on the disaggregated regulatory approach, the arguments for regulatory intervention were analyzed. There is no evidence of network-specific market power in the market for Internet interconnectivity. Only in related local telecommunications infrastructure is there a possibility that monopolistic bottlenecks still exist which lend market power to the bottleneck owner. To hinder monopoly power leveraging from local telecommunications markets into Internet service provision, regulation should guarantee non-discriminatroy access to the monopolistic bottlenecks in local telecommunications markets where they still exist.

Selected Publications

Monographs, Contributions to Edited Volumes

Discussion and Working Papers

Vanberg, Margit (2005), Network Externalities and Interconnection Incentives, ZEW Discussion Paper No. 05-80, Mannheim. Download

Selected Events

Project duration

01.03.2006 - 31.03.2007

Project members

Dr. Margit Vanberg


Digital Economy