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Abstract -- Internet Economics: What Happens When Constituencies Collide Policy Track
P4: Economics and Pricing

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Internet Economics: What Happens When Constituencies Collide

Bailey, Joseph ( bailey@rpcp.mit.edu)
McKnight, Lee ( mcknight@rpcp.mit.edu)


Internet economics is a growing area of concern to members of the technical, business, academic, and user communities. While new applications, new users, and new connections have spurred on the Internet to become an important medium for communication, information dissemination, and electronic commerce, the economic policies currently undergirding the Internet may be less extensible. For example, interconnection points with flat-fee settlements may provide improper incentives for use and may lead to inequitable cost recovery by the interconnected firms. This paper examines how the different constituencies' often conflicting and overlapping interests are yielding to a rough consensus. This consensus has become the foundation for the field of Internet economics. The findings documented in this paper are partially a result of the authors' work resulting from an Internet Economics Workshop. The workshop, held in Cambridge, MA at MIT on March 9 & 10, 1995, was initiated and organized by the authors.

The paper first identifies and characterizes the different academic disciplines which have done work related to Internet economics: technology, management, and policy. The growth of the Internet is explained by its economic feature of positive network externalities, its technical characteristic of statistical sharing, and its policy objective of interoperability. Each of these areas has important contributions to make to the field but there has been little consensus across disciplines (or even within disciplines) on which direction to take. The paper analyzes conflicting views on congestion control mechanisms to reduce latency in the Internet. This is an area that has been studied extensively by Internet engineers. However, their proposed technical solutions do not take into consideration the possible economic solutions to congestion control. On the other hand, economists realize that some users may pay for Internet services with reduced latency. Pricing these services properly could lead to a more equitable payment mechanism and possibly greater extensibility. Management is important since these services would therefore be designed with payment and accounting schemes which are still being developed.

The paper then provides a critical analysis of different pricing policies associated with Internet economics. This includes pricing for congestion control and interconnection. We explore the work done in more mature fields of telecommunications, such as telephony, and argue that many of the assumptions underlying this application-specific pricing policy is difficult and costly to implement for the Internet. Furthermore, we conclude that the Internet culture and economics are much different than that of other telecommunication networks. These differences lead to fundamental differences in the way we look at the Internet as an economic system.

The paper critiques some more recent proposals for Internet-specific pricing and discuss why these proposals have not been implemented. We also provide some evidence where new pricing policies have been tried and provide analysis of their failures and limited successes.

Finally, we explore areas of opportunity where new solutions to Internet economic problems may be explored. Specifically, we recommend five action items. 1. Further discussion and analysis of Internet pricing models and policies, perhaps facilitated by electronic mailing lists and directed workshops, which would include all necessary parties so that integrated approaches may be implemented. 2. The Internet Engineering Task Force (IETF) should be a forum for standardizing practices of accounting methods and security for electronic commerce on the Internet with increased emphasis on the underlying problems of Internet economics. 3. New open, interconnection agreements should be sought out, drawing from the work done in related fields. 4. New services promised by a new version of the Internet Protocol, IPv6, must have incentive policies to encourage appropriate use of these services. 5. Increased data collection between Internet service providers will provide an understanding about the growth of the Internet and provide a rich data set to develop economic models and increase our understanding of the subtle interaction between Internet engineering, economics, and cultural practices. Better understanding would lead presumably to better economic performance while safeguarding the Internet culture and further stimulating the powerful innovation engine the Internet has become for the emerging Global Information Infrastructure.