Discussion Papers

J. Scott Marcus

Interconnection in an NGN Environment

Nr. 274 / Mai 2006

Summary

The NGN represents a synthesis of existing world of the "traditional" Public Switched Telephone Network (PSTN) with the world of the Internet. The economic and regulatory arrangements for the two have historically been very different. What should happen when these two worlds collide?

The NGN interconnection problem is best understood, not as a problem of technology, but rather as a problem of economics. With that in mind, this report seeks to review what is known about interconnection from an economic perspective, in order to reach conclusions about likely NGN interconnection solutions going forward and the corresponding implications for policymakers.

This report begins by laying out, for the most part at a non-technical level, the established theory of interconnection, for both the PSTN and the Internet. Wholesale and retail arrangements are considered separately. At the level of economic theory, the PSTN and the Internet are not worlds apart. Economics provides the necessary bridge between the two worlds, illuminating both the similarities and the differences in these two environments.

Most of the observed behavior of interconnection in the PSTN and in the Internet can be explained in terms of a constellation of known economic effects: market power, the termination monopoly, demand elasticity, network externalities, transaction costs, service differentiation, price discrimination, and the Coase theorem (which says that private parties can often negotiate arrangements more efficiently than government regulators, provided that necessary preconditions have been met).

With this theory in hand, the report considers the implications of the migration to NGNs in terms of the deployment of differentiated Quality of Service, and the impact on universal service. It also considers the implications of layered IP-based technology and the associated changes in industry structure –­ service providers are ill-equipped to measure or to charge for the network provider’s resource consumption, and vice versa.

Finally, the report examines a hypothetical scenario, a "thought experiment", where the historic wired and mobile incumbent of European country upgrades its networks to an IP-based NGN. We consider the likely results in terms of regulation of the access network, and of interconnection; likely domestic and international interconnection arrangements; and the implications for ubiquitous support of QoS.

Diskussion Paper is available for download.

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