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Competition and compatibility among Internet service providers

Foros, Øystein; Hansen, Bjørn
Working paper
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URI
http://hdl.handle.net/11250/162960
Date
2001-03
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  • Discussion papers (SAM) [675]
Abstract
We consider a two-stage game between two competing Internet service providers(ISPs). The firms offer access to the Internet. Access is assumed to be vertically and horizontally differentiated. Our model exhibits network externalities. In the first stage the two ISPs choose the level of compatibility (i.e. quality of a direct interconnect link between the two networks). In the second stage the two ISPs compete á-la Hotelling. We find that the ISPs can reduce the stage 2 competitive pressure by increasing compatibility due to the network externality. The firms will thus agree upon a high compatibility at stage 1. When it is costly to invest in compatibility, we find that the firms overinvest, as compared to the welfare maximising investment level.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2001:4

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