Peering and settlement in the Internet: An economic analysis

This paper explores the implications of Internet peering in the context of a model of competing, vertically integrated Internet Access Providers. We s how that if regulation forbids settlement payments between firms, there wil l be under-investment in capacity and under-pricing of usage, both of which lead to excessive congestion. To overcome these problems, firms that are n et providers of Internet infrastructure should be allowed to charge firms t hat are net users. We characterize the efficient level of these access paym ents, assuming usage can be appropriately measured. We find that refusal to peer and the charging of settlement payments may well be efficiency enhanc ing.