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Margin squeeze in the Internet backbone interconnection market: a case study of Korea


The present research analyzes the need for regulating the Internet backbone market by focusing on the Korean case, which resembles well the situation of the international market. The Korean market, indeed, follows the tier-based structure of the international market, whereas it is one of the few countries that have regulated to some extent interconnection among Internet service providers (ISPs) by dividing the exchange traffic into direct and indirect. Moreover, likewise it has being discussed at the international level, recently some Korean ISPs have raised a local discussion about the need for improving regulation in the local Internet backbone market because of a potential margin squeeze. These interconnection issues have been stressed by the network value gap among ISPs in the Korean context. The present research shows that when asymmetric networks compete with price discrimination, environments lacking of effective regulation may lead powerful backbone ISPs to squeeze other competitors’ profits and monopolize the lower-tier market by raising interconnection charges. Consequently, our findings suggest that the Korean government should more actively monitor the charges in the Internet backbone market, while discuss the potential need for additional regulatory intervention in these cases.

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  1. 1.

    International Tier-1 ISPs refer to operators that can secure all routing paths through peering only without transit service.

  2. 2.

    These statistics include the self-supply volume.

  3. 3.

    According to Akers and Krishnamurthy [21], some of the key features in physical networks are their diameter, congestion, connectivity, and infrastructure. In other words, those elements that express the potential capacity and coverage of a physical network stand as important characteristics when networks should interconnect. The three Korean Tier-1 ISPs have officially the same position in the market. Hence, the three of them have been evaluated by the government to be able to provide full coverage backbone and same quality of service (i.e., Tier-2 and Tier 3 ISPs may connect to any of the three Tier-1 ISPs and receive the same service regardless their physical location).

  4. 4.

    Moreover, Laffont et al. [22] postulated that “balanced patterns” can be violated in specific cases. For example, in situations where international specialization of backbones together with other factors, such as language affinity, may induce some violations of this hypothesis (e.g., Chinese consumers may be more likely to browse U.S. websites than U.S. customers are to browse Chinese websites). The Korean market (national level), though, is not this case.

  5. 5.

    Profit is analogous to indirect utility when referring to organizations rather than to individual users. Profit is defined as a financial benefit that is realized by a company when the amount of revenue gained from a business activity exceeds the expenses, whereas indirect utility is defined as the maximum utility that can be enjoyed by an end user considering the prices of the goods or services.

  6. 6.

    We use [] to notate functions (e.g., \(f\left[ x \right] =f\) is a function of \(x\)). In this case, \(p\) represents price.

  7. 7.

    Revenue is analogous to utility when referring to organizations rather than to individual users. Revenue is defined as the total financial benefit produced by a particular source (e.g., good or service), whereas utility refers to the total satisfaction received by an end user from consuming a good or service.

  8. 8.

    Net profit is analogous to net surplus when referring to organizations rather than to individual users. Accordingly, net profits included profits from on-net traffic and off-net traffic.

  9. 9.

    An increasing function \(f\) is for all \(x\) and \(y\) such that\(x\le y\), then\(f\left[ x \right] <f\left[ y \right] \).


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Correspondence to Christian Fernando Libaque-Saenz.

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Choi, S.M., Libaque-Saenz, C.F., Lee, S. et al. Margin squeeze in the Internet backbone interconnection market: a case study of Korea. Telecommun Syst 61, 531–542 (2016).

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  • Interconnection
  • Margin squeeze
  • Internet backbone market
  • Internet regulation