The Political Economy of Congestion Charges and Settlements in Packet Networks

This paper examines the case for usage-based pricing in the Internet. We extend earlier work by Mackie-Mason and Varian [21] on congestion-based pricing in a single network to the case of multiple, competing carriers, and examine the problem of settlements between service providers that arises. With optimal congestion prices, it will probably be necessary to allocate revenues to the multiple, competing carriers who comprise the Internet and PSTN. The settlements mechanism that is applied may have important implications for service providers incentives to interconnect and invest in network capacity. The tumultuous history of the settlements process for local access facilities and to fund universal service in the PSTN [5] suggests that this problem will not be trivial and provides a useful background for identifying the new challenges posed by settlements in packet-based networks.