Advances in Routing Technologies and Internet Peering Agreements

Spurred by improvements in routing technology, the architecture of the Internet is evolving. Until recently, nearly all routing took place through parallel hierarchies, in which each core Internet service provider (ISP) at the top of its own hierarchy provided other core ISP’s with routes to its own customers and customers of non-core ISP’s in its hierarchy. Based partly on the ability and incentives of some core ISP’s to deny or degrade service to others, antitrust authorities required the divestiture of internetMCI as a condition for the MCI–WorldCom merger and blocked the proposed merger of Sprint and MCI-WorldCom. Recent changes in routing standards have enabled a wider range of routing arrangements, and these evidently reduce the market power of the core ISP’s vis-à-vis their customers. We argue here that those new standards also reduce the incentives of core ISP’s with large market shares to refuse or degrade service to ones with smaller market shares. Our analysis is based on a bargaining model, which provides a means to assess how the short-run bargaining positions of various core ISP’s are affected by the new routing arrangements.