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Interconnection: An Economic Perspective Peyman Faratin (CSAIL) Steven Bauer (CSAIL) David Clark...
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Transcript of Interconnection: An Economic Perspective Peyman Faratin (CSAIL) Steven Bauer (CSAIL) David Clark...
Interconnection: An Economic Perspective
Peyman Faratin (CSAIL)
Steven Bauer (CSAIL)
David Clark (CSAIL)
Bill Lehr (CSAIL)
Arthur W Berger (Akamai,CSAIL)
Patrick Gilmore (Akamai)
Tom Wilkening (Economics)
Interconnection Problem• AT&T - Carter phone & Hush-a-Phone (blocking)• ….• 2002: Madison-River - Vonage (blocking)• 2005: Cogent-Level 3 (disconnecting)• 2006: AT&T - Google (tiering)• 2007: T-Mobile2 (blocking)• …• ICE (Farrell and Weiser), Agency (Milgrom et.al), • Entry Story -- because of lack of quality competition in interconnection
Two-Sided Markets (New Institutionalist Model) A model of value-flows - demand information Market failures
• “middlebox”/overlays entry • Interconnection discrimination incentives (given cost-allocation mechanism)
Industrial Organization: Two-Sided Markets
• Generative: Design aid
• Business Model
• Descriptive: future regulatory thinking
Causal Hypothesis of Interconnection Problems
Architecture
IO & Contracts
Information & Behaviors
Outcomes
The Trinity:Institution, Strategies and Outcomes
InstitutionInstitution• architecture• contract• policy
OutcomesOutcomes• Scalability, Resilience, Convergence• Fairness, Innovation, Profitability
Strategic Strategic AgentsAgents
Transfer Distribution Ambiguities (“we know how to route packets but not money”)
AS1AS1
AS2AS2
contentcontent
$
AS1AS1
AS2AS2
$
Ambiguities Galore
AS1AS1
AS2AS2
contentcontent
$
AS2AS2
$
AS1AS1
contentcontent
AS2AS2
$
AS1AS1
Solution: Bi-lateral Volume-Based Contracts
• Retail market (bursty): Flat-rate Peak-rate tiered pricing
• Wholesale market (better aggregation “deeper in”): Full transit
• Transfer level = non-linear• Transfer structure = asymmetric
Peering• Transfer level = 0• Transfer structure = N/A
Emerging mechanisms: Paid-peering & Partial Transit
• Distribution of Fixed and Usage pricing
Architecture
IO & Contracts
MIT http://www.google.com
End-Hosts Bear Cost of Transport
AS
AS AS
AS
$
$
$
$
$=0
$=0
No E2E Accounting for Tastes
ISP $$Eyeballs EstablishedWebServer
$$$$
ISP ?$Eyeballs PublicWebServer
?$
ISP $$$$Eyeballs GrowingWebServer
$
Coordination Failures Has Led to E2E Market-Failures
IAP1
IBP2
CUi
CPj
CPm
CUk
Pi1
Pj1
Pk2
Pm2
P12
Market-Failure Induced CDN EntryAKAM: 20,000 servers,900 networks,70 countries,750 cities, serving ≈ 15% of content
CDN
IAP1
IAP2
CUi
CPj
CPm
CUk
Pi1
Pj1
Pk2
Pm2
P2
P1
PjCDN
PmCDN
IBP2
P12
P22
PC2
Pj2
Strategies and Outcomes
Contracts
Information & Behaviors
Outcomes
The Trinity:Institution, Strategies and Outcomes
InstitutionInstitution• architecture• contract• policy
OutcomesOutcomes• Fairness• Growth
• Profitability
Strategic Strategic AgentsAgents
Who Should Pay Who?Primitive = Value-Flows
ISP
i jPi
Pj
pi
pj
I
IIIII
IV
(0,0)
“Free Goods”
Q: what is the optimalprice structure for ISP to maximize profits?
eyeball Content Provider
Value-Flow Discrimination
Q: what is the optimal price structure?A: Depends on:
• Relative size of value flows (cross-market externalities)• Fixed / Per transaction prices• Single v.s Multi-homing
pi
pj
45o
ISP
i jPi
Pjeyeball Content
Provider
Established commercial web-server $$ ISP $$$ eyeballs
Complementarities/Interactions: Multi-Product Markets
Value-Flows/Externalities: Chicken-Egg Problems
Two-Sided Markets
• But platform has to solve “chicken-egg” Problem: if there were more women, then more men would come, more women would come, more men would come,…. discrimination is welfare enhancing. “ladies nights”
Non-Discrimination Institution
InstitutionInstitution• “no ladies night”
OutcomesOutcomes• Fairness• Growth
Strategic Strategic AgentsAgents
Does Institution Implement Desired Outcome?
• Rule (motivated by “fairness”): No bars can access discriminate based on sex
• Q: Does rule implement a “fair” & innovative outcome in the presence of strategic actors?
• A: No. Institution is “fair” but gives no growth incentives. Neutrality rule is not neutral with respect to growth tussle between objectives
Result of Rule: Closes Some Markets, Others Grow but
Inefficiently
Strategic Preferences of Content Providers & Users
ISP $$$$Eyeballs GrowingWebServer
ISP $$Eyeballs EstablishedWebServer
$$$$
ISP ?$Eyeballs PublicWebServer
?$
$
Strategic Agent Preferences: The Platform (in Presence of
Externalities)• Platform (ISP/CDN) solves for efficient prices:
market price level ( ) and price structure
• Profit maximizing pricing structure in presence of externalities is often discriminatory (subsidize one side of the market to stimulate demand on other side - c.f. bar) Strong incentives to discriminate
P*
[Pi*,Pj
*]
Network Neutrality Law or Current Architecture & Protocols
InstitutionInstitution• “the architecture can’t / shouldn’t
do that”• “no price
discrimination for same service”
OutcomesOutcomes• Fairness• Growth
Strategic Strategic AgentsAgents
(1:Customer, 2:Content Provider)(1:Customer, 2:Content Provider)
3: Platform: 3: Platform: ISPISP
Unintended Outcome of Institution: Market Closures
ISP $$Eyeballs EstablishedWebServer
$$$$
ISP ?$Eyeballs PublicWebServer
?$
ISP $$$$Eyeballs GrowingWebServer
$
Externalities Create Surplus Expansion Opportunities (v.s.
Capture)• Traditional (one-sided) Price discrimination
Discrimination increases the profits of the monopolist but may open some markets that would otherwise be closed.
• … platform intermediaries in a TSM seek to maximize profit by transferring surplus from seller to consumer thereby growing the market Growth on one side of the market induces
growth on the other, creating surplus that can be captured
Market-Failure Induced CDN Entry:Akamai: 20,000 servers, 900 networks, 70 countries, 750 cities, serving ≈ 15% of
content
CDN
IAP1
IAP2
CUi
CPj
CPm
CUk
Pi1
Pj1
Pk2
Pm2
P2
P1
PjCDN
PmCDN
IBP2
P12
P22
PC2
Pj2
Architectural Tools We Provide
• The real question is how to architect for it: Change in demand in i market /
change in demand in j market Source-destination discrimination App discrimination Per packet/per flow bit discriminate Encryption ….
• There is a delicate tradeoff involved in how much information we provide and how much we lose/gain in objectives we are interested in Architecture
IO & Contracts
Information & Behaviors
Outcomes
Conclusion• Interconnection
Not only a L2, L3 problem Contract engineering and value-flows Agents use mechanisms strategically Tussle over outcomes
• Open Questions: Preferences over outcomes/objectives CDN Tipping and Market-Power
• 2 tiered Internet? Externality Information for monitoring and regulation
• Industrial Organization A tool for architecture & policy
Future: ICWG• Data
War Stories/cases • Peering of video • Exclusivity contracts• Games being played• ….
Quantities and prices data to support theory data to build theory
• Informative process to all Designers ISPs Policy makers
Auxiliary Slides (I)
Information and Strategic Games
Competition: Peering+Transit Strategic Interactions
• All compete to: establish and maintain peering
• Competition over: Eyeball Networks Content
• Colo CP (Apple iTunes, Microsoft,..)• Stub ASs (Yahoo, Google,…)• Non-stub Tier2 content (transit providers to content Stub AS)
“Normal” Business Strategy of LE-LC
LCLE
Strongest Peering Incentives
• Assume LE-LC interconnect under peering• LC’s problem is to keep ratios
LE-LC Strategies
LCLE
• Observations: Eyeballs are fixed, content can move (switching costs of content is
lower) perception of bargaining power by LE LE doesn’t care about being out of balance & in fact wants to be out
of ratios so it can demand payments (paid-peering)
“Equilibrium” in Establishing New Peering between Strategic
Networks
A < E, B > F
G > C, H < D
LC
P P
LE
P(A,B)
(C,D)
P(E,F)
(G,H)
LE-LC Peering Establishing Strategies
LCLE
• LE strategy: LC asks to peer (or upgrade peering facilities to keep abreast
of traffic flows) LE refuses and demands higher settlements (paid-peering)
because:• it is LC who is out of ratios and causing costs• Operational costs (AOL)• Precedence settings leads to economic loss on the long-run
Most LCs refuse to pay, but some do concede. Some content owners on LC who doesn’t concede switch to LCs that do.
LE-LC Strategies: Vertical + Horizontal
LCLE
• LC’s Counter strategy (“chicken”): If LE refuses to peer/upgrade peering then LC sends some traffic via transit Punishing strategy: LC bears P2 (which may even be above cost of P1), but LE has to pay P3
• Condition: Strategy only works if both LC&LE are transit customers of tier1. If LE has peering with tier1 & LC sent via transit then LC would in fact be helping LE because LE would look bigger to tier 1
tier1tier1 tier1tier1
P1
P2P3
LC’s Strategy to Keep Ratios: Sell Low-cost Transit (Poaching:
Vertical+Horizontal)
SE
LCLE
• LC’s strategy: Peering link is full-duplex and LC is mostly outbound To keep ratios LC needs to pull sell transit to SE Poaching SEs by setting P2 at or even below cost LE P2P traffic to SE goes via LC
P2
LC’s Strategy is Reactive and Proactive
SE
LCLE
P2T
SESE
Ratio Balancing Needs Create Poaching Competition, Downward Pressure on
Transit Prices and Quality
SE
LCLE
• Margins of gain of poaching strategy to maintain peering shrinks as P2 falls
• Excess reductions of P2 lowers quality/performance of transit because incentives of LC to manage are eroding?
P2
LCLC
Salient Economic Features
• Dynamic efficiency (innovation)
• Operator IO is highly complex (no clear upstream/downstream)
• Behavioral: Direct & indirect network Effects Unobservability Coordination failures
Auxiliary Slides (II)
TSM Model
How ISP Determines its Optimal Price Structure:
Geometry of the Problem
ISP
i jPi
Pj
pi
pj
I
IIIII
IV
(0,0)
“Free Goods”
Q: what is the optimalprice structure for ISP to maximize profits?
eyeball Content Provider
Value-Flow Discrimination
Q: what is the optimal price structure?A: Depends on:
• Relative size of value flows (cross-market externalities)• Fixed / Per transaction prices• Single v.s Multi-homing
pi
pj
45o
ISP
i jPi
Pjeyeball Content
Provider
Established commercial web-server $$ ISP $$$ eyeballs
Total Consumption
i’s “native” demand
qi Di(pi) e jiD j (p j )
demand of i due to demands of j
Total Consumption
network externality term (how much purchases in j market affects purchases in the i market)
qi Di(pi) e jiD j (p j )
q j D j (p j ) eijDi(pi)
e ji q iq j
Benchmark: eji = eij = 0
pi(pj)
pi
pj
pj(pi)
1/2
1/2
Po = (1/2,1/2)
pj
eji=0
pi
pj
eji=3/4
pi
pj
eji=11/10
pi(pj)
pj(pi)
eij q jq i
1/3
Architectural Guide
• eij a potential candidate for value-flow proxy
Value-Flow and Structural
Q: what is the optimal price structure?A: Depends on:
• Relative size of cross-group externalities• Fixed / Per transaction prices• Single v.s Multi-homing pi
pj
45o
ISP1
ijPi Pjusr
GoogleISP2usr
Assumptions• Network’s tariff:
Charges to i market for subscription Charges to j market for traffic termination
• i market single-homed Makes single either-or decision competition between
platforms for i market i chooses network that maximizes its surplus
• j market multi-homed Makes independent join decisions no competition between
platforms for j market j puts more weight on network benefits of being in contact with
widest population of i market than transaction costs of multiple platforms
Equilibrium Tariff (M. Armstrong)
• Low subscription charges to i market and high termination charges to j market Equilibrium termination charges to j market maximizes i market
and network’s profits and ignores j market welfare.
pi
pj
I
IIIII
IV
Multi-homing Reduces Competition and Welfare
• Single-homing side is treated well, m-homing side’s interest are ignored at equilibrium (i is even cross-subsidized)
• “Competitive bottleneck”: even if market for content users is highly competitive, so that profits of networks are lowered, there is no competition for providing services to content providers.
Engineers Provide Tools to Firms: Design-Evaluate Cycle
• IO methodology: puts economics (back) into the design
consideration, but after protocol design
Allows “comparative statics” - “what happens to welfare if we change the institution”
Build testable models to ask “what-if” questions on efficiency-fairness tradeoff
Future
• Competition for ideas and incentives Strategic agents will use technical & regulatory
tools to their economic advantage
• FIND (2006): 3/10 economic (CABO, Virtualization, Architecture
of all fiber networks) Highly recommend talking to economists &
regulators SIGCOMM 08 Workshop?• MIT’s Interconnection Working Group
David Clark, Steven Bauer, Bill Lehr, Peyman Faratin, Akamai
Markets
ISP
i jPi Pj
qjqi
usr Google
Geometry of the Price Discrimination Problem
pi
pj
i has relatively more externalityimpact on j
j has relatively more externalityimpact on i
MC
Demand
• Each market has a continum of consumers willing to buy one discrete unit of good (transport service)
• Let v be arbitrary willingness to pay of an individual
• Then D(p) is the market demand
CU’s Market Demand
vp dDdpi
-Vi
-Qi
D(p
i)
-
v
Maximum marketsize (in absenceof network externalities)
Maximum service value (in absenceof network externalities)
Total Consumption
i’s “native” demand
qi Di(pi) e jiD j (p j )
demand of i due to demands of j
Total Consumption
network externality term (how much purchases in j market affects purchases in the i market)
qi Di(pi) e jiD j (p j )
q j D j (p j ) eijDi(pi)
e ji q iq j
Measures
q j D j (p j ) eijDi(pi)
q jpi
eijDi' (pi)
Spill-over/TS network externality = cross-price (i to j) contribution to salesin j market.
Measures
r
q jpi
qip j
Importance of the spill-over effects
qi Di(pi) e jiD j (p j )
q j D j (p j ) eijDi(pi)
Externality of CPs to CUs
• As CPs use more transport then CUs max. service value for transport increases
-Vi
-Qi
D(p
i)
qi Di(pi) e jiD j (p j )
Externality of CPs to CUs
-Vi
-Qi
qi Di(pi) e jiD j (p j )
• CU value increase
Di 1(e jiD j )
Consumer Surplus
-Vi
-Qi
-Vi
-Qi
Si = QiVi / 2
Sji = (eji Qj)Vi /2
= QiVi / 2
qi Di(pi) e jiD j (p j )
Surplus Division v.s. Capture
• Third-Degree Price discrimination Firms offer nonlinear prices to mixed markets
force heterogeneous consumers to self select (Peak-rate pricing?)
Mechanism differentially extract consumer surplus and transfer it to the seller
• … platform intermediaries in a TSM seek to profit by transferring surplus from seller to consumer Growth on one side of the market induces growth
on the other, creating surplus that can be captured
Monopoly Pricing in Absence of Network Externality (Po)
(monopoly sets prices in the two markets independently, implicitly
assuming eij = eji = 0)
Monopoly CUs Profits
-Vi
-Qi
-Qi / 2
-Vi / 2
io
i piQi(1piVi
)
pio Vi2
,qio Qi2
io ViQi
4Si
4
(qi
o, pi
o)
Monopoly Pricing with Network Externality (P*)
(monopoly sets prices in the two markets interdependently, eij eji > 0)
• Assume: j market (CPs) demand for transport is
inelastic i market (CUs) demand for transport is
elastic eji eij > 0
qi / pj > 0 (Positive TS, spillover, effect)
qi Di(pi) e jiD j (p j )
q j D j (p j ) eijDi(pi)
qj=eijDi(pi)
qi=Di(pi)
pi
qi=ejiDj(pj)
qj=Dj(pj)
pj
+
+
+
+
+-
-
-
eji eij > 0, i > j
qj=eijDi(pi)
qi=Di(pi)
pi
qi=ejiDj(pj)
qj=Dj(pj)
pj
+
+
+
+
+-
-
- pi
qi
qj
pj
qi
pi
pj
qi
pi
Asymmetricity in Externalities
• Now vary the relative influence of CP CU
–eji eij > 0
Benchmark: eji = eij = 0
pi(pj)
pi
pj
pj(pi)
1/2
1/2
Po = (1/2,1/2)
pi(pj)
pi
pj
pj(pi)
1/2
1/2
III
III IV
eij = 1/3pj
eji=0
pi
pj
eji=3/4
pi
pj
eji=11/10
pi(pj)
pj(pi)