Competitive Effects of Network Externalities on Interconnection Incentives of ISPs

Overview

The Internet is a classical example for a network good. Network goods not only offer utility from a so-called technology effect (resulting from the technological characteristics of the network the user is connected to), but also from a so-called network effect (resulting from the number of people reachable via the network). A strong technology effect, in combination with heterogeneity in consumer tastes, allows providers of network goods to differentiate their products and compete also with different network sizes. When the network effect is sufficiently strong and consumer valuation of a large customer base accordingly high, the question becomes whether competition in the market is hindered by the presence of network externalities such that the largest network can monopolize the market.