The Bucket Brigade: Pricing and Network Externalities in Peer-to-Peer Communications Networks

Title: The Bucket Brigade: Pricing and Network Externalities in Peer-to-Peer Communications Networks

Authors: Sam Chandan and Christiaan Hogendorn

Abstract: This paper analyzes the pricing of transit traffic in wireless peer-to-peer networks using the concepts of direct and indirect network effects. It explores two scenarios: a decentralized market with competitive pricing and a club market with user-formed pricing clubs. The research finds that in a decentralized market, a true network externality occurs, leading to a smaller peer-to-peer network than the social optimum. In a club market, a single club can internalize all network externalities. As the indirect network effect becomes stronger than the direct network effect, the number of clubs increases, leading to further divergence from the social optimum. The optimal market structure for peer-to-peer communications networks depends on whether the network effects are primarily direct or indirect. The study concludes with implications for regulatory policy, suggesting that price-fixing in peer-to-peer environments might be welfare-enhancing.

Main Research Question: How can network externalities be managed in peer-to-peer communications networks to achieve an optimal market structure?

Methodology: The research employs economic analysis and modeling to examine the pricing of transit traffic in wireless peer-to-peer networks. It considers both a decentralized market and a club market scenario, using the concepts of direct and indirect network effects. The study uses mathematical models and simulations to test the effects of network growth, user incentives, and market structures on the overall network performance.

Results: The research finds that in a decentralized market, a true network externality occurs, leading to a smaller peer-to-peer network than the social optimum. In a club market, a single club can internalize all network externalities. As the indirect network effect becomes stronger than the direct network effect, the number of clubs increases, leading to further divergence from the social optimum.

Implications: The study concludes that the optimal market structure for peer-to-peer communications networks depends on whether the network effects are primarily direct or indirect. It suggests that price-fixing in peer-to-peer environments might be welfare-enhancing, as it allows users to internalize network externalities and improve network performance. This finding has implications for regulatory policy and the design of market structures in peer-to-peer communications networks.

Link to Article: https://arxiv.org/abs/0109081v1 Authors: arXiv ID: 0109081v1