Interconnecting Differentiated Networks

Interoperability and Networks, the Internet, and Cloud Computing

Article Snapshot

Author(s)

Alexei Alexandrov

Source

NET Institute Working Paper #08-07, October 2008

Summary

This paper analyzes the utility of different levels of interconnectivity and interoperability between firms.

Policy Relevance

There is extreme promotion generally of interconnectivity and interoperability on policy grounds; this paper provides a thorough discussion of the utility of different levels of interconnectivity that firms and government can use to make better decisions.

Main Points

  • This paper analyzes situations where there is interconnectivity between firms, but both consumer and social welfare suffer.
    • Interconnection/interoperability can be bad for consumers because demand becomes less elastic after interconnection, allowing firms to compete less aggressively and charge more.

 

  • Interconnection allows both the incumbent and the entrant not to compete as much on prices. Also, while the incumbent might not gain as many new consumers as without interconnection, the increased price margin more than makes up for the loss.

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