The Internet evolved in a largely unregulated environment. Recent developments have, however, initiated a discussion among economists on the role of regulation and antitrust in the market for Internet service provision. Proponents of regulation argue that the market for top-level Internet backbone connectivity is highly concentrated and that there are high barriers to entry into this market. Internet Service Providers (ISPs) of lower levels of the Internet hierarchy depend on network interconnection to at least one of these top-level ISPs in order to be able to offer universal connectivity to their customers. The goal of this project was to offer a differentiated analysis of the market for Internet service provision and a well-founded assessment of the regulatory requirements of this market.

Generally, the appraisal of competition in network industries requires a reference model for competition, which allows for the typical characteristics of network industries without automatically equating these with market power. The theory of monopolistic bottlenecks was introduced as a reference model which is designed explicitly for localizing stable market power in network industries. According to this theory, only monopolistic bottleneck network areas, defined as market areas with both natural monopoly characteristics as well as sunk costs, lend stable network-specific market power to the owner of the bottleneck element. Ex-ante sector-specific regulation of network sectors can only be justified, when such monopolistic bottlenecks are found.

The study categorizes the elements of Internet service provision according to a general layered model of communications networks. This model is then used to identify monopolistic bottlenecks in Internet Service Provision which could justify the application of sector-specific regulation. The disaggregated analysis of the network elements in the value chain of Internet service provision leads to the conclusion that, at least in some geographic regions, parts of the local communications infrastructure located on the physical layer of Internet service provision must be considered monopolistic bottleneck network elements. These infrastructure elements are often already subject to regulation, as they are part of the regulated telecommunications networks. The analysis concludes that there are no monopolistic bottleneck network elements in the Internet-specific long-distance network capacity or on the logical layer of Internet service provision, which are at the center of the discussion on potential Internet regulation.

Selected Publications

Monographs, Contributions to Edited Volumes

Project duration

01.01.2003 - 31.12.2006

Contact
Project members

Dr. Margit Vanberg

Departments

Digital Economy