Pricing and Network Externalities in Peer-to-Peer Communications Networks (Draft)

THIS PAPER analyzes the pric ing of transit traffic in wireless peer-to-peer networks using the concepts of direct and indirect network externalities. We first establish that without any pricing mechanism, congestion externalities overwhelm other network effects in a wireless data network. We show that peering technology will mitigate the congestion and allow users to take advantage of more the positive network externalities. However, without pricing, the peering equilibrium breaks down just like a bucket brigade made up of free-riding agents. With pricing and perfect competition, a peering equilibrium is possible and allows many more users on the network at the same time. However, the congestion externality is still a problem, so peering organized through a club may be the best solution. † Authors’ Affiliation: Doctoral Candidate, The Wharton School, University of Pennsylvania, 3100 Steinberg Hall-Dietrich Hall, Philadelphia PA 19104-6372 and Master’s Candidate, School of Engineering and Applied Science, University of Pennsylvania. Telephone: +1 (215) 898-9619. Electronic mail: [email protected]. ‡ Assistant Professor of Economics, Department of Economics, Wesleyan University, 238 Church Street, Middletown CT 06459-0007. Telephone: +1 (860) 685 2340. Electronic mail: chogendorn.web.wesleyan.edu.