““““Electronic Communications Electronic Communications Infrastructure and Competition Policy: an Infrastructure and Competition Policy: an

insight into the European Experience” insight into the European Experience” Emanuele Giovannetti Emanuele Giovannetti

School of Economics UCTSchool of Economics UCT

Alessio D’IgnazioAlessio D’IgnazioUniversity of CambridgeUniversity of Cambridge

Infrastructure and Growth – Theory, Empirical Evidence and Policy Infrastructure and Growth – Theory, Empirical Evidence and Policy LessonsLessons

Cape Town, May 29-31, 2006Cape Town, May 29-31, 2006

www.CoCombine.orgwww.CoCombine.org

Plan of the talkPlan of the talk

A snapshot of the Internet InfrastructureA snapshot of the Internet Infrastructure

Antitrust Issues for the Internet and EU Regulation Antitrust Issues for the Internet and EU Regulation

Problems in applying standard antitrust testsProblems in applying standard antitrust tests

Description of the New data available – and their use Description of the New data available – and their use for the inference of business relationsfor the inference of business relations

Applications to market concentration indexes and to Applications to market concentration indexes and to detection of “unfair” interconnection practicesdetection of “unfair” interconnection practices

Relation to the game theoretic literature on Relation to the game theoretic literature on interconnectioninterconnection

Internet as an infrastructureInternet as an infrastructure

The Internet is an infrastructure essential as The Internet is an infrastructure essential as an intermediate input in many production an intermediate input in many production processesprocessesThe geographical distribution of the Internet The geographical distribution of the Internet infrastructure is highly asymmetric and this infrastructure is highly asymmetric and this has strong repercussions on the cost of has strong repercussions on the cost of accessing the Internet and on the Digital accessing the Internet and on the Digital Divide.Divide.Also very important is the functioning of this Also very important is the functioning of this infrastructure, its infrastructure, its competitivenesscompetitiveness, the , the presence of presence of bottlenecksbottlenecks and the and the fairnessfairness of of its interconnection practicesits interconnection practices

The InternetThe Internet

Differently from many other Network industries, the Differently from many other Network industries, the “Commercial” Internet did not emerge as a natural “Commercial” Internet did not emerge as a natural monopoly. monopoly.

After the initial public investment in the NSF After the initial public investment in the NSF backbones in the US, different interconnections backbones in the US, different interconnections were privately and publicly added through time, to were privately and publicly added through time, to create today’s network of networks create today’s network of networks

The lack of an original monopolist does not The lack of an original monopolist does not preclude the possibility that crucial network nodes preclude the possibility that crucial network nodes can detain some type of monopoly power …an use can detain some type of monopoly power …an use it..it..

A A snapshot at the Internet snapshot at the Internet Infrastructure Topology Infrastructure Topology

The Internet seen before is different from The Internet seen before is different from Intranetwork infrastructures: Intranetwork infrastructures: UUNET/WorldCom European NetworkUUNET/WorldCom European Network

InterouteInteroute

Early Antitrust analysis for the Early Antitrust analysis for the backbone marketbackbone market

The first relevant antitrust enquiry was the 1998 MCI The first relevant antitrust enquiry was the 1998 MCI WorldCom merger analysis. The merger received an WorldCom merger analysis. The merger received an approval conditional on divesture of UUNET.approval conditional on divesture of UUNET.The second was about the MCI-WorldCom proposed The second was about the MCI-WorldCom proposed merger with Sprint in January 2000.merger with Sprint in January 2000.the Commission the Commission concluded that the proposed merger concluded that the proposed merger would have led to the emergence of a top level network would have led to the emergence of a top level network provider,provider, … …Able to act almost independently of its Able to act almost independently of its competitors and customers and to determine its competitors and customers and to determine its own, and its competitors, prices and the technical own, and its competitors, prices and the technical developments in the industry. developments in the industry.

New Regulatory Framework and New Regulatory Framework and the Commission’s guidelinesthe Commission’s guidelines

In July 2000 the Commission introduced a In July 2000 the Commission introduced a New New regulatory framework for electronic regulatory framework for electronic communication networks and services. communication networks and services. This was intended to provide a lighter regulatory This was intended to provide a lighter regulatory touch where markets have become more touch where markets have become more competitive competitive The application of the Regulatory framework The application of the Regulatory framework was then essentially described in the was then essentially described in the “Guidelines on market analysis and assessment “Guidelines on market analysis and assessment of significant market power ……” published on of significant market power ……” published on the 11th of July 2002.the 11th of July 2002.

The guidelinesThe guidelines

The Commission’s guidelines focus only on The Commission’s guidelines focus only on issues related to (i) issues related to (i) market definitionmarket definition; and (ii) ; and (ii) the assessment of significant market power the assessment of significant market power ((SMPSMP) )

The relevant market for a product is the The relevant market for a product is the smallest setsmallest set of products which, of products which, as a wholeas a whole,, does does not face competition from other products.not face competition from other products.This requires the estimation of the demand This requires the estimation of the demand cross elasticitiescross elasticities, to assess commodity , to assess commodity substitution. substitution.

Input Demand substitution: Input Demand substitution: Transit and PeeringTransit and Peering

ISPs have ISPs have two two main inputs of production, main inputs of production, since they have to transfer traffic across since they have to transfer traffic across networks these are two different forms of networks these are two different forms of interconnection.interconnection.Transit: Transit: provider-to-customerprovider-to-customer relationship: the relationship: the customer is provided connectivity to the entire customer is provided connectivity to the entire Internet, in front of a payment of a settlement fee.Internet, in front of a payment of a settlement fee.

Peering: bilateral Peering: bilateral peer-to-peerpeer-to-peer relationship: each peer relationship: each peer provides the other connectivity to its own network provides the other connectivity to its own network (customers) only, usually without any settlement fee.(customers) only, usually without any settlement fee.

The Internet hierarchy and The Internet hierarchy and Market definition Market definition

Tier-1Tier-1

Tier-1Tier-1

IBPIBP

ISP ISP

ISP ISP ISP ISP

ISP ISP

ISP ISP

IAP IAP

The Market for ISP’s inputsThe Market for ISP’s inputsDefining the relevant market would Defining the relevant market would require the estimation of require the estimation of cross-pricecross-price elasticities elasticities of input demands: for peering of input demands: for peering and transit.and transit.

However transit prices and peering However transit prices and peering agreements are often sealed in agreements are often sealed in confidential bilateralconfidential bilateral contracts contracts

Discrimination in Discrimination in interconnectioninterconnection

Furthermore input demand substitution is Furthermore input demand substitution is not smoothnot smooth since both peering and transit since both peering and transit contracts are rife with discrimination contracts are rife with discrimination practices:practices:

refusal to peerrefusal to peer, for peering,, for peering,

non linear pricingnon linear pricing, for transit., for transit.

This prevents the application of usual tests, This prevents the application of usual tests, like the SSNIP like the SSNIP (Small but Significant non transitory (Small but Significant non transitory

increase in price)increase in price) for market definition for market definition

Inference from new Dataset for the Inference from new Dataset for the micro- interconnection policiesmicro- interconnection policies

The objective is to The objective is to inferinfer the type of relation the type of relation describing the interconnection between two ISPs describing the interconnection between two ISPs and to use this for market definition and analysis.and to use this for market definition and analysis.Inference approaches are based upon publicly Inference approaches are based upon publicly available data:available data: Border Gateway ProtocolBorder Gateway Protocol ( (BGPBGP)) Internet Routing RegistryInternet Routing Registry ( (IRRIRR))

IRR =IRR = set of databases where the ISPs can publish set of databases where the ISPs can publish their routing policiestheir routing policies

BGP BGP = = setset of rules (paths) through which data packets of rules (paths) through which data packets are forwarded between connected networks are forwarded between connected networks (Oregon (Oregon Route View Project)Route View Project)

BGPBGP based inference relies based inference relies upon the “upon the “valley free” propertyvalley free” property

Each data packet follows a series of Each data packet follows a series of customer-to-providercustomer-to-provider or peer to peeror peer to peer relationships until it reaches a relationships until it reaches a peakpeak, then it , then it descends to the destination network following descends to the destination network following provider-to-provider-to-customercustomer relationships relationships

The interconnection The interconnection inference algorithms is inference algorithms is based on the idea that: based on the idea that: “valleys” are invalid“valleys” are invalid

Valley: would imply that a Valley: would imply that a customer pays to receive customer pays to receive traffic from a provider and traffic from a provider and to have it forwarded to to have it forwarded to another provider(GAO)another provider(GAO)

validinvalid

(valley)

2 Metrics for Asymmetry : Customer 2 Metrics for Asymmetry : Customer Cone and BetweennessCone and Betweenness

Once inferred the set of peer to peer and customer-provider relations one can derive the number of customers for each ISP: its Customer cone (CAIDA) as a proxy for market size.From the BGP data we can also read the micro-instructions (at the router level) describing the blueprint of traffic paths across ISPs The Betweenness of an ISP is defined as the number of paths that traverse it. We use it as a proxy for network centrality of an ISP.

Betweenness and Betweenness and BottlenecksBottlenecks

High betweenness indicates that an ISP High betweenness indicates that an ISP has a certain degree of market power has a certain degree of market power over the other ISPs in terms of over the other ISPs in terms of unavoidabilityunavoidability

This measure is particularly relevant for spotting bottlenecks, or partial essential facilities, often the root cause of market power in network industries

Market ConcentrationMarket Concentration

We used these 2 metrics to calculate 2 different We used these 2 metrics to calculate 2 different Herfindahl-Hirschman Index of concentration: divided by geography, and vertical segment of the market,

HHI=∑imi2

One based on the customer cone looking at concentration in Market Shares, the other based on betweeness looking at concentration in market centrality.Market is considered moderately concentrated when HHI is between 1000 and 1800, highly concentrated when HHI is greater than 1800Below we show calculations for Market Concentration,

location classlocation class specific Concentration Indexes specific Concentration Indexes

ClassClass No. of membersNo. of members HHI customer coneHHI customer cone HHI betweennessHHI betweenness

TIER 1TIER 1 88 12531253 19811981

CORECORE 2020 416416 616616

OUTER COREOUTER CORE 2626 10371037 17111711

TRANSITTRANSIT 6363 324324 452452

ISP CustomersISP Customers 3434 303303 471471

LINXLINX Matrix Matrix 151151 241241 460460

TIER 1TIER 1 77 14321432 22442244

CORECORE 2121 526526 746746

OUTER COREOUTER CORE 2525 840840 19161916

TRANSITTRANSIT 7777 302302 298298

ISP CustomersISP Customers 4444 285285 370370

AMS-IXAMS-IX Matrix Matrix 174174 251251 512512

LINX

AMS-IX

Strategic interconnection Strategic interconnection modelsmodels

We can use the same database to assess fairness of We can use the same database to assess fairness of interconnection practices, among competitorsinterconnection practices, among competitors

In any network industry Interconnection affects In any network industry Interconnection affects competition for downstream users and vice versa, competition for downstream users and vice versa, hence the choice of the interconnection is a hence the choice of the interconnection is a strategic strategic gamegame

Together with the competition effect, there is however Together with the competition effect, there is however also an opposite also an opposite complementarity effectcomplementarity effect (network (network externalities) to be consideredexternalities) to be considered

Peering between competitors: Peering between competitors: contrasting resultscontrasting results

Crémer, Rey, and Tirole (2000)Crémer, Rey, and Tirole (2000)

Jahn and Prüfer (2004) Jahn and Prüfer (2004)

Weiss and Shin (2004) Weiss and Shin (2004)

Foros and Hansen (2001) Foros and Hansen (2001)

Baake and Wichmann (1999)Baake and Wichmann (1999)

Economides (2005)Economides (2005)

Badasyan and Chakrabarti (2003)Badasyan and Chakrabarti (2003)

Asymmetry leads to business

stealing if interconnected

Asymmetry leads to Network

complementarity if

interconnected

Results from TheoryResults from Theory

Crémer,Crémer, Rey and Tirole (2000)Rey and Tirole (2000) The quality of The quality of interconnection decreases when the difference in installed interconnection decreases when the difference in installed base of customers increases. base of customers increases.

Foros and Hansen (2001) Foros and Hansen (2001) firms do not have conflicting firms do not have conflicting interests about the interconnection quality, whether they interests about the interconnection quality, whether they have different exogenous off-net quality or not.have different exogenous off-net quality or not.Baake and Wichmann (1999), Economides (2005) Baake and Wichmann (1999), Economides (2005) Peering may be profitable even if it leads to lower market Peering may be profitable even if it leads to lower market share for one of the ISPs (due to business stealing share for one of the ISPs (due to business stealing effect).Indeed, higher prices can be charged in front of effect).Indeed, higher prices can be charged in front of higher network qualityhigher network quality

Fairness in interconnection Fairness in interconnection among asymmetric players?among asymmetric players?

In the following we assess the role played In the following we assess the role played by asymmetry in interconnection by asymmetry in interconnection

We consider a peering relation as a form We consider a peering relation as a form of non discriminantory interconnection, of non discriminantory interconnection,

Transit is the alternative to this.Transit is the alternative to this.

We consider also other possible We consider also other possible geographical factors.geographical factors.

ISPs Location and peering links, does ISPs Location and peering links, does distance matter for interconnection?distance matter for interconnection?

Model ResultModel Result

dependent variable: peeringdependent variable: peering ProbitProbit LogitLogit

Customer cone - Customer cone - Market Size Market Size 0.0040.004 0.0080.008

SIZE DIFFERENCESIZE DIFFERENCE (10.26)(10.26) (9.26)(9.26)

Membership of IXPsMembership of IXPs 0.0430.043 0.0700.070

SIZE DIFFERENCESIZE DIFFERENCE (3.67)(3.67) (3.62)(3.62)

Location Location 0.0250.025 0.0440.044

GEOGRAPHIC DISTANCE GEOGRAPHIC DISTANCE (2.83)(2.83) (3.01)(3.01)

ReputationReputation 0.2810.281 0.4630.463

COMMON NUMBER OF IXPsCOMMON NUMBER OF IXPs (10.45)(10.45) (9.91)(9.91)

BetweennesBetweennes –Network Centrality–Network Centrality -0.128-0.128 -0.220-0.220

SIZE DIFFERENCESIZE DIFFERENCE (23.87)(23.87) (20.90)(20.90)

constantconstant -0.096-0.096 -0.170-0.170

((1.80)1.80) (1.90)(1.90)

Inferred AgreementsInferred Agreements

Internet Internet OperatorsOperators ISPsISPs

ISPsISPs

ConclusionsConclusions

The model improves prediction:The model improves prediction:Predicting that there is always a peering Predicting that there is always a peering relation between any two ISPs, we would relation between any two ISPs, we would guess right in guess right in 56,256,2%% of the cases, given the of the cases, given the actual frequency of Peering at the LINX.actual frequency of Peering at the LINX.By using the independent variables of the By using the independent variables of the model introduced, we obtained model introduced, we obtained 68.6 % 68.6 % of of correct guesses about the peering relation. correct guesses about the peering relation. But, what is the relation between asymmetry and But, what is the relation between asymmetry and the the “fairness”“fairness” of interconnection contracts? of interconnection contracts?

Conclusions Conclusions

We introduced two distinct metrics to model the We introduced two distinct metrics to model the providers’ asymmetry: the providers’ asymmetry: the customer conecustomer cone, a proxy for , a proxy for “market share” and the “market share” and the betweennessbetweenness, expressing the , expressing the market power, by showing the degree of market power, by showing the degree of unavoidabilityunavoidability of a provider in the Internet traffic routing. of a provider in the Internet traffic routing.

The two variables representing competitors’ The two variables representing competitors’ asymmetry have asymmetry have opposite opposite effects. effects. Difference in Difference in betweenness,betweenness, affects affects negatively negatively peering, while the difference in the peering, while the difference in the customer conescustomer cones affects affects positivelypositively its probability. its probability.Finally Geographical differentiation also has a Finally Geographical differentiation also has a positive positive effect on peering.effect on peering.

ConclusionsConclusions

The contrasting results of the game theoretic literature The contrasting results of the game theoretic literature can therefore be liked to the type of asymmetry can therefore be liked to the type of asymmetry considered: considered: Crèmer, Rey and TiroleCrèmer, Rey and Tirole, (2000), findings reflect the , (2000), findings reflect the role of asymmetry in terms of network centrality, role of asymmetry in terms of network centrality, expressing market power via the expressing market power via the betwennessbetwenness. . Foros and HansenForos and Hansen (2001), and (2001), and Economides Economides (2005), (2005), pointing to differentiation and network externalities can pointing to differentiation and network externalities can be linked to a notion of asymmetry in terms of be linked to a notion of asymmetry in terms of customer customer conescones. . This richness of roles played by ISPs’ asymmetry in This richness of roles played by ISPs’ asymmetry in affecting affecting fairness fairness of the interconnection decisions should of the interconnection decisions should be carefully considered by Antitrust Authorities when be carefully considered by Antitrust Authorities when assessing Network Industries Cases.assessing Network Industries Cases.

ConclusionsConclusions

Thank youThank you

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ContactsContacts

giovannetti@cantab.netgiovannetti@cantab.net