Advertisement

Springer Nature is making Coronavirus research free. View research | View latest news | Sign up for updates

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

Abstract

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.

This is a preview of subscription content, log in to check access.

Fig. 1
Fig. 2
Fig. 3
Fig. 4

Notes

  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\(f\left[ x \right] <f\left[ y \right] \).

References

  1. 1.

    Statovci-Halimi, B., & Franzl, G. (2013). QoS differentiation and Internet neutrality. Telecommunication Systems, 52(3), 1605–1614. doi:10.1007/s11235-011-9517-1.

  2. 2.

    Weller, D., & Woodcock, B. (2013). Internet traffic exchange: Market developments and policy challenges. OECD Digital Economy Papers, No. 207.

  3. 3.

    Cremer, J., Rey, P., & Tirole, J. (2000). Connectivity in the commercial Internet. The Journal of Industrial Economics, 48(4), 433–472.

  4. 4.

    Weiss, M. B., & Shin, S. J. (2004). Internet interconnection economic model and its analysis: Peering and settlement. Netnomics, 6(1), 43–57.

  5. 5.

    Baake, P., & Wichmann, T. (1999). On the economics of Internet peering. Netnomics, 1(1), 89–105.

  6. 6.

    Giovannetti, E., & Ristuccia, C. A. (2005). Estimating market power in the Internet backbone. Using the IP transit Band-X database. Telecommunications Policy, 29(4), 269–284.

  7. 7.

    ITU. (2007). International Internet interconnection: Next generation networks and development. Paper presented at the Global Symposium for Regulators, Dubai, United Arab Emirates.

  8. 8.

    Djoumessi, P. T. (2011). International Internet connectivity. Paper presented at the BDT Seminar on Costs and Tariffs, Gaborone, Botswana.

  9. 9.

    Fan, Q. (2005). Regulatory factors influencing Internet access in Australia and China: A comparative analysis. Telecommunications Policy, 29(2–3), 191–203. doi:10.1016/j.telpol.2004.11.007.

  10. 10.

    Frieden, R. (2011). Rationales for and against regulatory involvement in resolving Internet interconnection disputes. Yale Journal of Law & Technology, 14(1), 266.

  11. 11.

    Frieden, R. (2014). The costs and benefits of regulatory intervention in Internet service provider interconnection disputes: Lessons from broadcast signal retransmission consent negotiations. http://ssrn.com/abstract=2474295.

  12. 12.

    Foros, Ø., & Hansen, B. (2001). Competition and compatibilityamong Internet Service Providers. Information Economics andPolicy, 13(4), 411–425. doi:10.1016/S0167-6245(01)00044-0.

  13. 13.

    Little, I., & Wright, J. (2000). Peering and settlement in the Internet: An economic analysis. Journal of Regulatory Economics, 18(2), 151–173.

  14. 14.

    Guthrie, G., & Carter, M. (1996). User charges for Internet: The New Zealand experience. Telecommunication Systems, 6(1), 301–313. doi:10.1007/BF02114300.

  15. 15.

    KISDI. (2013). Assessment of competition in Korean telecommunications market. Seoul, Korea: Korea Information Society Development Institute.

  16. 16.

    MSIP. (2013). Notification for interconnection. Seoul: Ministry of Science, ICT and Future Planning.

  17. 17.

    ETRI. (2012). The meeting report by interconnection task force. Daejeon: Electronics and Telecommunications Research Institute.

  18. 18.

    Sidak, J. G. (2008). Abolishing the price squeeze as a theory of antitrust liability. Journal of Competition Law and Economics, 4(2), 279–309.

  19. 19.

    Heimler, A. (2010). Is a margin squeeze an antitrust or a regulatory violation? Journal of Competition Law and Economics, 6(4), 879–890.

  20. 20.

    De Bijl, P., & Peitz, M. (2002). Regulation and entry into telecommunications markets. Cambridge: Cambridge University Press.

  21. 21.

    Akers, S. B., & Krishnamurthy, B. (1989). A group-theoretic model for symmetric interconnection networks. IEEE Transactions on Computers, 38(4), 555–566.

  22. 22.

    Laffont, J.-J., Rey, P., & Tirole, J. (1998). Network competition: I. Overview and nondiscriminatory pricing. The RAND Journal of Economics, 1–37.

  23. 23.

    De Bijl, P., & Peitz, M. (2002). New competition in telecommunications markets: Regulatory pricing principles. Cambridge: Cambridge University Press.

  24. 24.

    Gans, J. S., & King, S. P. (2001). Using ‘bill and keep’ interconnect arrangements to soften network competition. Economics Letters, 71(3), 413–420.

  25. 25.

    Jahn, E., & Prüfer, J. (2008). Interconnection and competition among asymmetric networks in the Internet backbone market. Information Economics and Policy, 20(3), 243–256.

  26. 26.

    Berger, U. (2005). Bill-and-keep vs. cost-based access pricing revisited. Economics Letters, 86(1), 107–112.

  27. 27.

    Briglauer, W., Götz, G., & Schwarz, A. (2010). Can a margin squeeze indicate the need for deregulation? The case of fixed network voice telephony markets. Telecommunications Policy, 34(10), 551–561. doi:10.1016/j.telpol.2010.04.001.

Download references

Author information

Correspondence to Christian Fernando Libaque-Saenz.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

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). https://doi.org/10.1007/s11235-015-0010-0

Download citation

Keywords

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