1. The Internet ISP Internet Backbone Provider Internet Backbone Provider Internet Backbone Provider ISP

2. Big Fixed Costs in Networks P Q AC

3. What is demand relative to scale? P Q D AC

4. What is demand relative to scale? P Q D AC

5. Internet Backbone Provider A NAP Internet Backbone Provider C Internet Backbone Provider B

8. Sequential Monopoly Broadband service made up of Access and ISP Assumption of no monopsony power for now Demand for Broadband (Final product) P = 200 – 10Q

9. Sequential Monopoly (Con’t) Demand for Broadband (Final product) P = 200 – 10Q Access provider bundles and sets MR bband = MC access + P isp So P isp = MR bband -MC access

10. Sequential Monopoly (con’t) $ Q D Broadband Demand

11. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband

12. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband MC access P isp = MR bband -MC access

13. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband MC access P isp = MR bband -MC access MR isp

14. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband MC access P isp = MR bband - MC access MR isp MC isp Q

15. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband P* D isp MR isp MC isp Q*

16. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband P* D isp MR isp MC isp Q* MC bband P** Q**

17. Sequential Monopoly Math D bband : P = 200 - 10Q MC isp = 10 MC access = 20 D isp = 200 – 20Q – 20 = 180 –20Q Set MR isp = MC isp  180 – 40Q = 10 Q = 4.25  P isp = 95, P bband = 157.5 Solve single monopoly and get Q = 8.5, P= 115.

18. Sequential Monopoly Profits  isp = (P-MC)* Q = (95 –10)* 4.25 = 361.25  access = (157.5 – 95 - 20)* 4.25 = 180.625 Total  = 541.875 Single Monopoly Profits:  monop = (115 – 30)*8.5 = 722.5 Overall welfare increases in this case

19. Sequential Monopoly (con’t) $ Q D Broadband Demand MR bband P* D isp MR isp MC isp Q* MC bband P** Q** Increased Profit

20. Price Squeeze?  = (P u - C u )*Q O + (P D - C D )*Q i(1) where Q O is quantity of others and Q i is firm quantity If firm sells no upstream, Q O = 0  = (P D - C D )*Q i(0) Decision depends on PC margins and Q’s

21. Incentive to Squeeze? If Q market stays the same, then if (P D - C D )> (P u - C u ) Q market ↑ Q market ↓

22. Sequential Monopoly Assumed fixed proportions Markup can lead to inefficient substitution Price can rise or fall in this case

26. Congestion Too much traffic Drop packets or delay delivery Pricing solutions

27. Congestion Pricing $ Q SRMC c D QsQs c + K

28. Congestion Pricing $ Q SRMC c D QsQs c + K Q*

29. Peak Load Pricing $ Q SRMC c D peak QsQs c + K D off peak

30. Without Peak Pricing $ Q SRMC c D peak QsQs c + K D off peak P* Loss from overcapacity Loss from overpricing QOQO QpQp

31. What Does Peak Pricing Do? Low value users stop or shift e-mail High value users get priority (and pay) video conferencing

32. Shifting Peaks $ Q D peak c + K D off peak Q Off Q Peak LRMC Demand for capacity Q* P Off P Peak