# Pricing communication networks P12

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## Pricing communication networks P12

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Kết nối Hai bên được kết nối với các mạng khác nhau có thể giao tiếp với nhau nếu có kết nối của hai mạng. Các ngoại mạng mà kết quả tích cực khi các mạng được kết nối là một lực lượng kinh tế kết nối giữa các nhà cung cấp lái xe mạng. Tiếp cận công nghệ hiện đại, tăng cường kết nối internetwork bằng cách cung cấp truy cập phổ cập. Một khách hàng sử dụng hệ thống truy cập không dây có thể truy cập mạng từ bất kỳ vị trí địa lý. Kết nối quan trọng...

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## Nội dung Text: Pricing communication networks P12

1. Pricing Communication Networks: Economics, Technology and Modelling. Costas Courcoubetis and Richard Weber Copyright  2003 John Wiley & Sons, Ltd. ISBN: 0-470-85130-9 12 Interconnection Two parties that are connected to different networks are able to communicate with one another if there is interconnection of the two networks. The positive network externalities that result when networks are connected are an economic force driving interconnection between network providers. Modern access technology strengthens inter- network connectivity by providing universal access. A customer using a wireless access system can access the network from any physical location. Interconnection is important if networks are to offer truly global services. Network service providers often negotiate special interconnection agreements and tariffs so they can provide the best service to their end-customers. These play a vital role in ensuring the smooth operation of today’s worldwide Internet. They also provide substantial income for network operators who have invested in building large backbone networks. By buying interconnectivity, a small network can appear larger to its customers, without investing in costly and rapidly changing infrastructure. This helps it to offer services that can compete with those offered by a network that has invested in greater geographical coverage. There are important incentive issues involved in offering interconnection services. Unless prevented by the contract, the network that provides the service may be tempted to discriminate in favour of trafﬁc that originates from its own end-customers and against trafﬁc that originates from end-customers of its ‘customer’ network. If that customer network is a direct competitor in the market for retail services, then the interconnection service provider has an incentive to offer a poorer quality of transport to the interconnection trafﬁc than to his own internal trafﬁc. A carefully chosen interconnection charge can correct this inequality by making transport quality a measured part of the contract. In this chapter we introduce some important concepts in interconnection services. Sec- tion 12.1 reviews types of interconnection agreement and pricing. In Section 12.2 we brieﬂy consider the effect of competition on service differentiation and in Section 12.3 we consider the factors that motivate networks to interconnect or not. Section 12.4 is about the asymmet- ric information problem that can arise when one network buys interconnection service from another. Section 12.5 describes how an incentive contract can be used to solve this problem. 12.1 The market structure 12.1.1 Peering Agreements Once interconnection is in place, a network service provider can use the infrastructures of a number of other networks to provide services to any of his customers. However,
2. 280 INTERCONNECTION it is only reasonable that he should transfer part of the charge that he makes to his customer to those other providers whose networks are used to provide the customer’s service. Traditional telephone networks use the so-called accounting rate system to share charges. Interconnection charges are computed on a per call basis, and the network in which the call originates pays a predeﬁned charge to the network that terminates the call (and possibly to intermediate networks). This is implemented by each carrier computing his ‘trafﬁc balance’ with the other carriers over a certain time period, and then paying in proportion to it. In today’s data networks, things are different. First, since customers are connected to the Internet and data ﬂows in all directions, there is no notion of charging on a per call basis. Second, interconnection is achieved by there being a number of Network Access Points (NAPs), at which many different networks interconnect with each other. As a function of the interconnection agreements between network providers, and routing decisions in the interior of the network (which may depend on how network congestion and topology changes), data can ﬂow unpredictably through intermediate networks. In present Internet practice there are two ways that trafﬁc is exchanged between data network providers. The ﬁrst is peering, in which trafﬁc is exchanged without payment, and the second involves interconnection charges for transit trafﬁc. Peering agreements have some distinct characteristics. Peering partners exchange trafﬁc on the bilateral basis that trafﬁc originates from a customer of one partner and terminates at a customer of the other partner. This allows customers of the two networks to exchange information. Note that peering agreements are only bilateral; so a peering partner does not agree to act as an intermediary to accept trafﬁc from a partner and transmit it to a third network. Peering trafﬁc is exchanged on a settlement-free basis, also known as ‘sender- keeps-all’. The only costs involved in peering arise from the equipment and transmission capacity that partners must buy to connect to some common trafﬁc exchange point. Peering agreements do not specify that a network should provide any minimum performance to the trafﬁc originating from his peer; such trafﬁc is usually handled as ‘best-effort’. Network providers consider several factors when negotiating peering agreements. These include the customer base of their prospective peer and the capacity and span of the peer’s network. Clearly, some providers have greater bargaining power than others. It may be of no advantage for a provider with a large customer base to peer on an equal terms with a provider with a small customer base. The second type of interconnection agreement is a transit agreement. It has important differences with peering. Now one partner pays another partner for interconnection and so becomes his customer. The partner selling transit services will route trafﬁc from the transit customer to its own peering partners as well as to other customers. He provides a clearly deﬁned transport service for the transit trafﬁc of the ﬁrst network, and so can charge for it in a way that reﬂects the service contract and the actual usage. This charge, if rightly set, is billed to the customer of the network in which the trafﬁc originated, and becomes one of the components of his total charge. Observe that transit is not the same service as peering. Refusing peering in favour of transit is not a means of charging for a service that was otherwise provided for free. When regional ISPs pay for transit they beneﬁt from the infrastructure investments of national or global backbones without themselves having to make the same investments. Transit gives an ISP customer access to the entire Internet, not just the customers of its peering partners. To fulﬁl his obligations, a transit provider must either maintain peering arrangements with other backbones or pay for transit to another backbone provider who maintains peering relationships.
11. MODELLING MORAL HAZARD 289 Let the contract specify that P pays A amounts w L or w H as A provides low or high effort respectively. Once these are known, A needs to decide whether or not to accept the contract. His decision is based on knowledge of the distribution of the rate of the internal trafﬁc at the point that service will be instantiated. At that point, he observes the rate of internal trafﬁc and decides what level of effort to provide to P’s trafﬁc. This decision is rational, and is based on the information available. He maximizes his net beneﬁt by simply computing the net beneﬁt that will result from each of his two possible actions. This is easy to ﬁnd for any given w L and w H . First, observe that if the value of the state is i, the rational action for A is j D arg max fw c.i`/g, and the payoff is w j c.i j/. Thus, the sign of w L w H [c.i L/ c.i H /] determines the most proﬁtable action for the agent. The participation condition (i.e. the condition under which A will agree to accept P’s trafﬁc) can be written as p1 maxfw L c.1L/; w H c.1H /g C p2 maxfw L c.2L/; w H c.2H /g ½ 0 Depending upon the parties’ risk preferences, different incentive schemes can result. For example, P might be risk-averse, while A is risk-neutral. This could happen if A, who is perhaps a backbone provider, has many customers and so can spread his risk. His expected utility is then the utility of his expected value. The ideal contract for P is one that induces A to choose the efﬁcient action, so maximizing total surplus from the interconnection agreement; and then extracts this entire surplus from A. (Note that A has to be willing to sign the contract – the participation condition must be satisﬁed – so that this is the best that P can achieve.) Simple convexity arguments suggest that a franchise contract is best for P. He keeps a constant amount F for himself, regardless of the outcome, and offers the surplus from the interconnection relationship minus the franchise payment F back to A. F is set so that A receives zero expected net beneﬁt (or some tiny amount). Suppose our risk-averse principal has a utility function of the form U .r w/, where U is assumed concave, and the random variables r and w are respectively the value obtained by the principal and the value of his payment to A. These are well-deﬁned for each pair w L ; w H . The principal’s problem is to maximize E[U .r w/] over w L ; w H , subject to A’s participation, and we know that this is achieved using a franchise payment F to P. For instance, if both actions L ; H are enabled by the optimal incentive scheme, w L ; w H must satisfy r L w L D r H w H D F for some F which should be equal to the difference between the average value generated for the principal and the average cost to the agent as a result of the incentive scheme w L ; w H . Observe that there are ﬁnitely many candidate Fs, since the number of different incentives provided by any choice of w L ; w H is ﬁnite (in our case four). This suggests that we ﬁrst compute all possible values for F and then choose w L , w H to realize the largest. This optimal F will depend on the values of the parameters r L , r H , c.1L/, c.1H /, c.2L/, c.2H /. There are four cases to consider: 1. Always select high effort. Then FH D r H [ p1 c.1H / C p2 c.2H /]. 2. Always select low effort. Then FL D r L [ p1 c.1L/ C p2 c.2L/]. 3. In state 1 select high effort, and in state 2 select low effort. Then FH L D p1 r H C p2 r L [ p1 c.1H / C p2 c.2L/]. 4. In state ð select low effort, and in state 2 select high effort. Then FL H D p1 r L C 1 Ł p2 r H p1 c.1L/ C p2 c.2H / . Let us restrict attention to the interesting case, r L < r H and determine the optimal value of F as a function of r L and r H . In the region marked FH in Figure 12.3, where r H r L ½