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- Herausgeber: Bentham Science Publishers
- Kategorie: Fachliteratur
- Sprache: Englisch
The internet represents a rapidly evolving set of technologies which is central to the development of a modern economy. Internet Economics: Models, Mechanisms and Management integrates knowledge about internet service design with economic modelling principles (pricing, cost and service models). Chapters highlight specific applications of the internet such as service provisioning, cloud computing, commerce, business security, network externalities, social media and more recent developments such as the Internet of Things (IoT), the industrial internet, data analytics and the use of big data to bring value to commercial ventures. Therefore, readers will have a conceptual and practical framework for understanding the economics of internet infrastructure and service delivery.
This text is essential reading for students and professionals involved in business programs and courses that focus on the commercial aspects of internet services and industries that rely on internet-based technologies.
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Veröffentlichungsjahr: 2017
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Internet Economics: Models, Mechanisms and Management
Authored by
Hans W. Gottinger
BENTHAM SCIENCE PUBLISHERS LTD.
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FOREWORD
A front-page leader in The Economist (28 January, 2017) showcases how in an era of protectionism, global companies are now in retreat. On the other hand, the world has become even more globalized and inter-connected, breeding a new generation of global enterprises and nimble, innovative small-and-medium-sized businesses, thanks to the pervasive internet and its integrated technologies and platforms. China alone now boasts of some 700 million netizens, more than double the entire population of the United States. The number of internet users is similarly rising across the globe, including Latin America and Africa, thanks to the ubiquitous smart phone and supporting networks.
Nothing illustrates the power of internet-economics better than President Trump’s apparent agreement that Jack Ma’s Alibaba internet-driven global business empire could help create a million American jobs by selling US goods and services to China and the rest of Asia, Trump’s China-bashing and protectionist rhetoric notwithstanding.
According to Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, instead of simple digitization (the Third Industrial Revolution), innovative combination of technologies (the Fourth Industrial Revolution) is upending business models, labor markets, socio-political matrix, and is reshaping our economic, social, cultural, and human environments.
A key trend is the development of technology-enabled platforms that combine both demand and supply to disrupt existing industry structures, such as the “sharing” or “on demand” internet economy.
The dynamics are multiplied by technology breakthroughs in artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.
In this topsy-turvy world of the 21st century, understanding internet economics, its complexity and operations, as well as its models, mechanisms and management, would be invaluable to practicing network designers and engineers as well as to industry managers and academic researchers.
For them and broader policy formulators, Dr Hans W. Gottinger’s book is a treasure-trove of timely, meticulous research.
Readers will find scholarly treatments of a variety of interrelated topics, including internet supply and demand, supply chain analytics, distributed market agencies, Quality of Service (QoS), network modelling and security, aggregated outcomes, output analysis covering financial services, healthcare and legal services, total factor productivity, Big Data, cloud computing, and much more.
I have no hesitation in commending Dr Gottinger’s book for all who are interested in exploring the complex, fast-moving, and integrated world of internet economics.
PREFACE
From its very early beginning as a project at ARPA (now US. DARPA), the Internet started out as a small scale communication paradigm for a well-established and regulated organization, the military, that over decades, expanded to virtually all dimensions of human life and activity, and seemingly transmitted borderless throughout the world. In substance and impact, it was more than evolutionary telecommunications tools and devices.
As economics described the various interactions of human endeavor targeted at social and commercial activities through information and communication, the Internet as a communication system would facilitate and expand economic interaction throughout an ever evolving network economy.
This text makes an attempt to provide an integrated view of internet economics which ranges from modeling internet structures akin to economy-wide modelling, from mechanism design to pricing, cost and service models in view of the changing technology structure of the Internet. From this, a major outcome is to merge networks and economies on a conceptual and practical level and highlight specific application areas such as service provisioning, cloud computing, commerce and business security, network externalities, social media and more recent enlargements to the Internet of Things (IoT), the Industrial Internet, Data Analytics and Big Data. Contentwise we attempt to pursue a middle-of-the-road path in that we don’t shy away from indicating technical issues but embed them in a larger context of relevance to economics and the economy system.
We look at the design of the Internet as a reflection of economic mechanisms in universal communication. Resource allocation would involve pricing and cost structures and face network access and regulation. Most approaches of resource allocation mechanism have used a performance model of the resource where the very concept of the resource is defined in terms of measurable qualities of the service such as utilization, throughput, response time (delay) and the like. Optimization of resource allocation is defined in terms of these measurable qualities. The operations research (OR) approach is to design a system which takes into account the diverse quality-of-service (QoS) requirements of users and therefore, uses multi-objective or multi-criteria (utilities)optimization techniques to characterize and compute optimum allocations. Economic (mechanism design) modelling of computer and communication resource sharing uses a uniform paradigm described by two level modelling: QoS requirements as inputs into a performance model that is subject to economic optimization. In the process one transforms QoS requirements of users into a performance (example: queueing service model). This model establishes quantifiable parameterization of resource allocation. For example, average delay QoS requirement, when based on queueing models, is a function of resources, bandwidth and buffer, and user traffic demands. These parameters are then used to establish an economic optimization model. We consider foremost decentralized models of network and server economies , where we show efficient QoS provisioning and Pareto allocation of resources (network and server resources) among agents and suppliers, which are either network routes or servers (content providers). It is shown how prices for resources are set at the suppliers based on the QoS demands from the agents.
A closed view of Internet -based distributed computer systems reveals the complexity of the organization and management of the resources and services they provide. The complexity arises from the system size (e.g. number of systems, number of users) and heterogeneity in applications (e.g. online transaction processing, e-commerce, multimedia, decision support, intelligent information search) and resources (CPU, memory, I/O bandwidth, network bandwidth and buffers, etc.)
In a large distributed system, the set of systems, users and applications is continuously changing. We address some of the management issues of providing Quality of Service (QoS), pricing, and efficient allocation of resources (computational resources) in networks and systems facilitated through economic mechanism design. The complexity increases on the expansion of three dimensions:
(i) on a web scale through multi-sided platform interactions, (ii) through the almost limitless expansion of the Internet of Things (IoT) and the Industrial Internet, and (iii) the evolvement of Big Data through volume, velocity and variety and their private, business and public use.
The book serves as an introductory, evolutionary account of Internet Economics, from micro to macro. It could be of interest to practicing network designers and engineers as well as to industry and academic researchers. Industrial economists in telecommunications, media and IT services are interested in Internet scale, scope and economics who wish to explore the subject matter further might benefit. The text is also suitable for graduation level courses in operations research, management science, and economics and public affairs programs. Several chapters could serve as supplements to industrial economics, intensive courses on specific topics, as well as complementary texts for mainstream economics or management courses.
Organization
In what follows, we briefly highlight the contents of the individual chapters.
Chapter 1 traces the evolution of the Internet in its historic setting, the emergence of Internet institutions, technologies, architectures and services. From this, an Internet industry was developed with major dominance in the telecommunications world. Some key economic issues involve Internet pricing, Quality of Service (QoS) provisioning, congestion management, Internet regulation and the backbone network technologies such as Asynchronous Transfer Mode (ATM) in view of traffic management and congestion control. The relation between service discipline and the varieties of the bandwidth-buffer tradeoff are discussed.
In Chapter 2, we consider the Internet as a market design for information with major actors supplying and demanding information, and supply and demand tending toward equilibrium. Concepts of information flows and delivery provisions would reflect game-theoretic models of trade and exchange economies where the mechanism (design) of information flows would adopt the behavior and outcome of mathematical queueing systems. Of particular interest are large scale systems of the Internet type that act and perform as decentralized distributed systems of multi-level control. A prototype economic optimization model has been put forward for a network economy with variation on traffic classes, utility parameters, queueing types and equilibrium approaches.
Chapter 3 considers specific examples of network economies with network routing and transaction processing. Any of these examples capture a structural model of the network economy with Pareto optimality and price equilibrium for agents competing for resources from emerging suppliers. A routing algorithm establishes the dynamic nature of of session arrival and departure.
Chapter 4 focusses on economic management of web services in distributed multi-media systems. We dig deeper into mechanism design approaches tracing them back to classical economic mechanisms of market designs and information economics which I refer to as Hayek-Hurwicz mechanism design – due to Austrian-British economist F.A. Hayek and American economist L. Hurwicz. The basic idea of market agents as computationally efficient human agents induced by incentive compatibility and selfishness has been rediscovered and reapplied in rigorous methodological form by computer scientists merging algorithmic game theory, computability and network complexity.
Distributed algorithmic mechanism design (DAMD) for internet resource allocation indistributed systems is akin to an equilibrium converging market based economy where selfish agents maximize utility and firms seek to maximize profits and the state keeps an economic order providing basic public goods and public safety. A distributed algorithmic mechanism design thus consists of three components: a feasible strategy space at the network nodes for each agent (or autonomous system), an aggregated outcome function computed by the mechanism and a set of multi-agent prescribed strategies induced by the mechanism. A distributed algorithmic mechanism design being computationally efficient in a large decentralized internet economy is a powerful paradigm to substantiate claims by Hayek (1945) that an industrialized economy based on market principles has an overall better output and growth performance (static and dynamic) than socialist type economies of a similar nature and scale. That puts historically the socialist planning debate in a new light which ironically, by some proposals, has been conducted on the basis of computational feasibility and superiority. Conclusion: Best economic coordination through markets producing maximal social welfare is supported by computational efficiency in computer science.
Applications relate to a data management economy.
In Chapter 5, we broaden the criteria for QoS performance and guaranteed service through reputation systems hinging on trust and belief, and as the Internet matures in promptness, reliability, accessibility and foremost security for a certain targeted QoS level which we termed as ‘Generalized QoS level’. GQoS should include emphasis on security, reputation and trust.
Chapter 6 opens up a new property of Internet enabled communication and computation that is intrinsincally linked to the interactive social and commercial use of websites through the World Wide Web (WWW), i.e. two-sided or multi-sided platforms. We provide a model of platform operations that involves a sequential decision process very much alike a dynamic programming algorithm (DPA) for selecting functionalities of the platform. This serves as a simple approximation procedure for building the optimal design of a platform. The platform business in a vertically integrated supply chain as well as toward product development is a good example of facilitating ‘increasing returns mechanisms’ (IRM), as one can follow the evolution of the Amazon platform in a commercial context but also on the growth of social media like Facebook and LinkedIn. Such a business growth would not have been facilitated without a dedicated, universal, easily accessible and low cost network economy provided by the Internet.
Chapter 7 shows how the Internet could lead to a radical expansion to the Internet of Things (IoT) with everything being connected up to a scale of aggregate capacity and complexity. It could evolve into a network where not only each node would be a computational device but by itself, it would also be an intelligent computing device that could replace human supervision and control through Artificial Intelligence (AI). The Internet of Things (IoT) as being embedded in the ‘Industrial Internet’ is a new paradigm shift that comprehensively affects computers and networking technology. This is also recently referred to the buzzword ‘Industry 4.0’. This technology is going to increase the utilization followed by Bandwidth of the Internet. More and more (intelligent) devices in this network are connected to the Internet through various combinations of sensor networks.
Chapter 8 focusses on huge online data generation through an expanded Internet (IoT and the Industrial Internet) and using the flux of information for monitoring, predicting, controlling and decision making. During the time of applying methods of statistical inference and statistical decisions some 70 years ago, information derived from data collection was considered costly. Models were built where information was linked to payoff relevance of a decision making criterion (utility or payoff function), therefore statistical information was handled to satisfy these criteria. Now as masses of online data through IoT are produced at relatively low costs, all these data could be quickly aggregated for business or government decisions. Statisticians have coined a term, ‘value of perfect information’, which was set up to integrate data points, collection and analysis through statistical inferential models i.e.,exploratory data analysis (EDA) or through statistical decision models . For example, achieving this goal is quite challenging to gather all the data for perfect information.
What really is subsumed under ‘Big Data’ (BD) qualifies under a few main characteristics: (i) BD is primarily network generated on a large scale by volume, variety and velocity and comprises large amounts of information at the enterprise and public level, in the categories of terabytes (1012 bytes), petabytes (1015) and beyond of online data. (ii) BD consists of a variety and diversity of data types and formats, many of them dynamic, unstructured or semi-structured and are hard to handle by conventional statistical methods. (iii) BD is generated by disparate sources as in interactive application through IoT from wireless devices, sensors, streaming communication generated by machine-to-machine interactions. The traditional way of formatting information from transactional systems to make them available for ‘statistical processing’ does not work in a situation where data are in huge volumes from diverse sources, and where even the formats could be changed.
While Internet economic effects in micro structures, that is, on enterprise and industry levels, have been our prevailing concern in previous chapters, Chapter 9 addresses network effects on a macro scale involving productivity, growth, and the business cycle. The network effect is strongly facilitated by computerization and information technologies (ITs). Ubiquitous computerization pervades many sectors of the economy, and communication by network technologies such as the Internet (the network is the computer) is a strong catalyst. Eventually, through this synergy, most sectors of the economy will be impacted by network effects. Thus, networking and computerization have far-reaching impacts on the pace and path of the economy but they could also make the economy more vulnerable to economic shocks and security breaches.
We address three important issues: Networks and productivity, endogeneous growth and increasing returns. Examples of some productivity- enhancing activities on the enterprise level which aggregates to impacting total factor productivity on a macro scale are (i) comput-erization of ordering along the supply chain, (ii) Internet-based procurement systems , and (iii) computer-based supply chain integration. There are many other examples of pervasive internet applications that trickle down to aggregate increases in productivity.
The relationship between technology and productivity used for the United States, on the economy or sector level, found little evidence of a relationship in the 1980s. Capital investment between 1977 and 1989 rose several hundred per cent but was barely reflected in a rise in output per worker. There was this famous saying by Nobel prize-winning economist Robert Solow (1987): “You can see the computer age everywhere except in productivity statistics”.
In the 1990s, such a positive relationship on the firm level was established empirically. On a short-term basis: one-year difference in IT investments vs. a one-year difference in firm productivity should be benchmarked by benefits equal to costs. However, benefits are supposed to rise by a factor of 2–8 in forecasting future benefits (in productivity growth).
Economic techniques focus on the relatively observable aspects of investment, such as price and quantity of computer hardware in the economy, but neglect intangible investments in developing complementary new products, services, markets, and business processes. The recent World Bank World Development Report (2016,) clearly states for the macro economy as three key factors of growth: (i) Inclusion – through international trade, (ii) efficiency – through capital utilization and (iii) innovation through competition.
Current statistics typically treat the accumulation of intangible capital assets, new production systems, and new skills as expenses rather than as investments. This leads to lower levels of measured outputs in the periods of net capital accumulation. Output statistics miss many of the gains of IT brought to consumers such as variety, speed, and convenience. For instance, US productivity figures do not take account quality changes, in particular, in services industries: (a) financial services sectors, (b) health care, and (c) legal services (online information).
As a time-dimensional cross-sectional review and synthesis of Internet economic and technological issues, this text naturally covers some overlapping areas , in particular, in Chapters 1 to 5. It also serves the purpose to make each chapter self-contained and self-serving on the development of the topics.
CONFLICT OF INTEREST
The author (editor) declares no conflict of interest, financial or otherwise.
Acknowledgements
The material in the book is for the most part the product of multi-year efforts on working and consulting network economies and innovation processes. In preparing the previous text ‘Networks, Competition, Innovation and Industrial Growth’, New York: NovaScience (2016), I was made to believe that network economics in terms of Internet Economics reveals some unique features of combining networks with technological change. From economic point of view, it is amazing how many positive network externalities are connected with the Internet but also with its growth and ubiquitness how many dark sides (negative network externalities) are proliferating so that one ultimately talks about high level of regulations in response to a potential cyber war against people, corporations and nations. Contrary to a widespread belief of economics as a dismal science, we tend to emphasize the positive aspects of Internet Economics though we do not deny some dark aspects with the implicit assumption that the net economic effect in most cases is positive.
With portions of the book, e.g. Chaps. 2-5, 7, we rely on the previous work of mine covered in the following articles:
1.“Network Economics for the Internet – Application Models”, iBusiness 3, 2011,313-322.
2.“Network Economies for the Internet”, Modern Economy 3, 2012, 408-423.
3.“Quality of Service on Queueing Networks for the Internet”, iBusiness 5, 2013, 1-12.
4.“Internet Economics of Distributed Systems”, Transactions on Networks and Communication 2(6), 2014, 56-72.
5.“Supply-Chain Coopetition”, International Journal of Business and Economics Research 4(2), 2015, 67-71.
6.“Vertical Competition and Outsourcing in a Supply Chain”, International Journal of Business and Economics Research 4(6), 2015, 315-322.
7.“Krohn-Rhodes Complexity on Decision Rules”, Advances in Social Sciences Research Journal 3(4), 2016, 30-43.
All of this background material can be found on www.researchgate.net_gottinger or www.hansgottinger.com
I want to specially mention and thank Prof. Stanley Reiter (Northwestern Univ., Evanston) on conversations regarding his work on Computation and Complexity, and the late Professor Leonid Hurwicz (Univ. of Minnesota) on economic mechanism design that relates to Chaps. 2-5. Also the insights of Prof. B. Vöcking, RWTH Aachen helped me to advance on applications to algorithmic game theory. Chap. 8 has been joint work with Dr. Soraya Sedkaoui at Montpellier University. The figures associated with Chaps. 2 and 3 have been provided by Mrs. Sabine Spiesz of Spiesz Design, Neu-Ulm. My special thanks to all of them.
The Evolving Internet: Technology, Regulation and Pricing
Hans W. GottingerAbstract
“The Age of Networked Intelligence is an age of promise. ... It is not just an age of linking computers but of internetworking human ingenuity” Don Tapscott, The Digital Economy (2015)
This chapter covers the evolution of the Internet in its historic setting, the emergence of Internet institutions, technologies, architectures and services. From this an Internet industry developed as taking major dominance in the telecommunications world expanding to a global context. Key economic issues involve Internet pricing, Quality of Service (QoS) provisioning, congestion management, Internet regulation and the backbone network technologies such as Asynchronous Transfer Mode (ATM) in view of traffic management and congestion control. The relation between service discipline and the varieties of the bandwidth-buffer tradeoff is also discussed. It shows improvements being made to effectively operate and manage networks that may support performance and guarantees in serving heterogeneous users with a wide range of requirements.
1.1. Introduction
In its early formation, the Internet was generally viewed as an experimental special purpose communication network linking research and defense related establishments in a US national and increasingly global context. In the 1990s, the Internet was increasingly seen as a principal pathway to a future information and communication structure. The new focus was on a general purpose information infrastructure, not limited to a special community of users, but raising the problems of universal service for the population at large and also involving business activities (Hatfield et al., 2005). By then, the problem was not only
posed as an issue of connectivity, as it was with the landline telephone system, but as one linked to the access of information. The Internet was sometimes termed as a ‘bottom-up infrastructure’ which relates to establishments and investments in local area networks (LANs) driven by distributed computing in military, university-type and enterprise networks. In this regard, it contrasts with online service systems such as ’Minitel’ offered by France Telecom, which essentially was a top down activity by a natural monopoly.
The US Department of Defense Advanced Research Projects Agency (DARPA) initially created the Internet to be a military network (Kleinrock, 1996; Ryan, 2010). It placed a high priority on considerations that have little relevance to commercial networks (such as survivability in the face of attack) and a low priority on considerations that are critical to a network’s commercial success (such as efficiency and cost accountability). Due the emergence of the Internet as a public Internet the technological and economic environments surrounding the Internet, have changed since the mid-1990s. Four major changes have impacted the network since then:
Increase in the number and diversity of end users. A small population of technologically knowledgeable researchers in the early Internet has been replaced by a user base that is much larger, more diverse, and less technologically sophisticated.Increase in the diversity and intensity of applications. Early Internet applications such as email and file transfers required relatively little bandwidth and were not particularly sensitive to variations in network performance. Modern applications, such as videoconferencing (through voice of internet protocol (VOIP)) and online gaming demand greater bandwidth, security and performance.Increase in the variety of technologies. When the Internet first emerged, almost everyone was connected to it via desktop computers attached to a landline connection. Dial-up modems have now given way to a multitude of end use networking technologies including cable modem systems, digital subscriber lines (DSL), fiber-to-the home (FTTH), and wireless broadband (WB). New technologies for transmission and traffic flows vary widely in terms of their available bandwidth, reliability, mobility and susceptibility to local congestion. The number of devices used to connect to the Internet has diversified as well and now includes laptops, smartphones, specialized devices (such as e-readers, tablets) and radio frequency identification tags (RFID). And further expansion is on the way through increased interaction of network devices and software agents involving the Internet of Things (IoT).The emergence of more complex business relationships. The topology of the Internet began as as a three-level hierarchy consisting of backbones, regional internet service providers (ISPs) and last mile providers. Over time, the networks comprising the Internet began to enter into a much more diverse set of business relationships., like private peering, multihoming, content delivery networks (CDNs), and server farms.These changes are placing increasing demand on the Internet to develop new architectural principles better suited to meet diverse demands that end users are placing on the network.
In the US, Internet Service Providers (ISPs) have been classified as ‘enhanced service providers’ by the Federal Communication Commission (FCC) and with the advent of the Obama Administration regulations, the attempts of regulations have increased significantly. In a more global context, in particular Europe and major parts of Asia, there are increasing attempts to regulate internet services, through various institutional means up to completely control the Internet. But with changing technology and industry structure, this will also be more difficult to accomplish.
A primary concern in regulating universal access to the Internet had been the issue of pricing its services, the maintainance of competition among providers and strengthening incentives for investments into the network infrastructure. In the early pre-1995, the Internet possible policy emerged in identifying the issues toward a workable model (Majumdar,Vogelsang and Cave, 2005):
Charging by access to telecommunications capacity, e.g. flat rate pricing and keeping distance independent pricing(‘the death of distance paradigm’),Consider network externalities in the economics and growth of networks, e.g. positive like scale, and negative like congestion effects,Introduce usage based linear pricing,Introduce usage-based nonlinear prices.The evolution of Internet pricing poses interesting concerns. Flat-rate pricing has been one of the factors that promoted the Internet to expand at a dramatic rate. It has enabled low-cost dissemination, beta testing and refinement of new tools and applications.The strength of many of these tools is their ability to operate in and rationalize a distributed and heterogeneous structure making it easier to identify and retrieve information sources. Flat rate pricing and usage based pricing made the Internet attractive to mass communication with many new users. However, as the Internet expanded and its dynamics in terms of usage, business and technologies proliferated new requirements of pricing through quality of service (QoS) provisioning emerged.
1.2. Industry Structure
From the emergence of the public Internet in the mid 1990s, it was fair to say that no one in particular owns the Internet but that virtually hundreds of companies own a small part of it. And an increasing number of companies have been requesting a share notably for e-commerce and social media. Beyond the established telephone companies, cable TV companies have also realized that the Internet had passed their interactive TV rivals. In a deregulatory environment, they were racing to offer Internet and other related services on their network. In this new world, commercial online service companies were positioning themselves to gain market share in a fast growing dynamic market but faced an uncertain future because offering services without content was not enough. In the same vein, telephone companies after staying on the sideline were fighting to regain positions. They were more than ever convinced that the Internet is a real threat to the telephone model to which one could only respond taking it as an opportunity. Then, it was already possible to make telephone calls through VOIP on the Internet from specially equipped computers; the spread of multimedia PCs and faster Internet connections could make this common place. At the same time, companies were turning an increasing amount of their telephone traffic into digital data and sending it through private data networks saving up to half their telecoms costs, regulation permitting, this traffic could eventually move to the Internet. The telephone companies’ initial choice was whether they participate in the cannibalization of their revenues or watch it happen. At this moment, neither the Internet nor any digital network, could handle all the world’s telephone calls. But credible predictions suggested that by the turn of the millenium, the Internet would carry more data than the voice networks. In a growing Internet, a few things were bound to happen. First, the telephone companies might be able to hook up enough customers to be able to impose the telephone model on the Internet under which they had thrived for so long. That means settlements, usage-based prices and the like. They might be supported by technical capacity limits to the Internet, to the extent that future demand outstripped capacity, to the extent that we would see bottlenecks and then slowing down and even halting of traffic through the network (Bohn et al., 1994). Second, it could also mean the creation of a more secure, faster and more efficient but higher priced Internet that is used as an orderly business network instead of the cheaper, more chaotic consumer network with minimal interconnection between them. But this scenario would fail to the extent that the customers would prefer the independent providers, and the telecoms would compete for a market with increasingly integrated services (voice, data and video).
1.3. Telecommunications and the Internet
The nature of the Internet flies in the face of traditional telecommunication policies within regulated environments. Early on the Internet has grown in unregulated environments and in parts has been subsidized. Given its history until the late 1980s the networks of the Internet were all noncommerical. Unlike telephone networks and cable systems which are both propriety and facility based, the Internet is a network of networks assembled from leased lines, routers, switches and hub-to-hub backbone interconnection. Low costs of leased lines have fostered rapid growth in the US relative to other world regions. The Internet offers a radical shrinking of communication costs underpricing conventional communication forms (such as telephone and fax). The cost-based environment of the Internet offers significant economies of scale though decreasing costs at the margin would tend to strengthen a ‘natural monopoly’ and therefore induce regulatory intervention. This would be counteracted by lowering the barriers to entry into the industry and strengthen competition among Internet Service Providers (ISP). Also, in the development of the Internet ‘economies of scale’ led to the formation of cooperative-style frameworks. The technology of the Internet permits efficient aggregation of traffic and sharing of network resources.
1.4. Internet Pricing
The Internet has overturned the conventional wisdom on building telecoms networks, as it has challenged the telephone pricing system.
The first is the, death of distance paradigm’. One reason why distant messages cost no more than local ones is that the Internet, even if it runs on phone lines, uses them through packet switching much more effeciently than voice calls do. A traditional voice call is an analog signal, called circuit switching, which needs a lot of electronic space to avoid interference, so it takes up an entrire line for the duration of the call. By contrast, the Internet is digital so its data bits can be suitably compressed.
Second, the Internet data are split into packets which do not need a line for themselves. Packets from many sources are mixed up by computer and pipelined in a major packet stream.The router at the other end of the line receives each one, reads its address and sends it into the right direction.When you send a message on the Internet, you are sharing a plentiful and cheap resource, the entire bandwidth on the line.
Third, telecoms pricing, though propagated as usage based pricing, has no clear economic justification. A large part of the price of a telephone call (sometimes more than 40 percent) goes to the recipient’s telephone company for taking it to the last few miles. Through a complicated accounting scheme known as ‘settlements’, telecoms companies exchange billions of dollars each year to pay for the local component of international calls. So long as the average usage of sending messages through the Internet will not exceed capacity it appears that it would cost as much sending one email as hundreds of emails that is nothing. Of course, each email does cost somebody something because it consumes a tiny bit of bandwidth (as a resource) the total of which is constituting capacity of data pipelines. But since the Internet providers have no way of billing for such incrementally small consumption they have settled for a rough approximation instead. Bearing better economic tools as presented further ahead in this text, as a rule of thumb, they multiplied the number of their subscribers by the average network usage to calculate the capacity they need to lease which would bet he basis of their calculation how much to charge. But as the Internet evolved, deepened and continuously expanded usage changes. In its early stages the Internet had been mostly a world of text which is an efficient way to communicate. But people hsve increasingly flooded the Internet with byte hungry multimedia. The World Wide Web (WWW) since its activation after 1989 accounted for an increasing share of the traffic on the Internet and swallows more bandwidth than any other service.
The major shifts in Internet usage suggests that its early architectural principles from the mid-1990s may no longer be appropriate today. Restructuring the Internet to best fit today’s usage requires responses to end use changes (Yoo, 2013).
Standardization: With the diversity of consumers, agents and their composition changing the optimal level of standardization must be adjusted accordingly.As consumer demand and technologies comprising the network become more heterogeneous, network protocols, topology and and business relationships will have to become more varied.Governance: The Internet originally relied on cooperative behavior of its users but with the increase in the number and heterogeneity of end users, the proliferation of social media, government censureship and cybercrime needs increased reliance on more formal modes of governance.Security and Congestion: The need of coordinating and controlling information about the actions of multiple users and negative network externalities in terms of security and congestion would put the focus on enhanced network service management.Internet Pricing: The complexity of Internet growth would be incompatible with a simple set of pricing relationships. The increasing heterogeneity of end users’ bandwidth consumption, the need to manage congestion, the growing importance of advertising as a revenue source are leading the industry toward a more diverse array of pricing arrangements.Dominance of Intermediation: While the Internet’s early architecture demonstrated the ability to bypass gatekeepers and allow agents to connect directly with others the transformation from person-to-person communication to a platform for mass communication has necesssitated intermediation. It takes advantage of new architectural approaches to delivering content.1.5. Quality of Service (QoS)
With the Internet we observe a single quality of service (QoS): ‘best effort packet service’ though subsequent protocols, IPng (IP next generation such as IPv4, IPv6), have broadened performance criteria. Packets are transported first, served with no guarantee of success. Some packets may experience severe delays, while others may be dropped and never arrive.
Different kind of data place different demands on network services . Email and file transfer requires 100 percent accuracy but can easily tolerate delay. Real-time voice broadcasts require much higher bandwidth than file trasfers, and can tolerate minor delays but cannot tolerate significant distortion. Real-time video broadcasts have very low tolerance for delay and distortion. Because of these different requirements, network allocation algorithms should be designed to treat different types of traffic differently but the user must truthfully indicate which type of traffic he/she is preferring, and this would only likely happen though incentive compatible pricing schemes. An example of such a scheme for asynchronous transfer modes (ATM) will follow next in Internet Communication Technologies (ICTs). Network pricing has been looked at early as a mechanism design problem . The user can indicate the ‘type’ of transmission and the workstation in turn reports this type to the network. To ensure truthful revelation of preferences, the reporting and billing mechanism must be incentive compatible.
1.6. Pricing Congestion
The social cost of congestion is a result of the existence of network externalities. Charging for incremental capacity requires usage information. We need a measure of the user’s demand during the expected peak period of usage over some period, to determine the share of the incremental capacity requirement. In principle it might seem that a reasonable approach would be to charge a premium price for usage during the predetermined peak periods (a positive price if the basic usage price is zero), as is routinely done for electicity pricing (Wilson,1993, Chaps.1,10,12; Laffont and Tirole, 2000, on telecommunications pricing). However, in terms of Internet usage, peak demand periods are much less predictable than for other utility services. Since the use of computers would allow to schedule some activities during off-peak hours, in addition to different time zones around the globe, we face the problem of shifting peaks. A broad review of cost and pricing issues in interconnected networks is provided by Gupta et al. (2005). By identifying social costs for network externalities the early suggestion by MacKie-Mason and Varian (1995) was directed toward a scheme for internalizing this cost as to impose a congestion price that is determined by a real-time Vickrey auction. The scheme requires that packets should be prioritized based on the value that the user puts on getting the packet through quickly. To do this, each user assigns his/her packets a bid measuring his/her willingness-to-pay (indicating effective demand) for immediate servicing. At congested routers packets are priorized based on bids. In line with the design of a Vickrey auction, in order to make the scheme incentive compatible, users are not charged the price they bid, but rather are charged the bid of the lowest priority packet that is admitted to the network. It is well-known that this mechanism provides the right incentives for truthful revelation. Such a scheme has a number of desirable characteristics. In particular, not only do those users with the highest cost of delay get served first, but the prices also send the right signals for capacity expansion in a competitive market for network services. If all of the congestion revenues are reinvested in new capacity, then capacity will be expanded to the point where its marginal value is equal to its marginal cost. This also fits into the framework of capacity pricing (Wilson, 1993, Chap. 11). A conceptual implementation of such a scheme based on competitive bidding for Internet directed ATM networks is described in Sec. 1.11. More universal price discrimination schemes within tiered services have been suggested as ‘Paris Metro Pricing’(PMP), Odlyzko, 1999). The PMP scheme separates the network into independent subnetworks that behave similarly but charge their customers at different rates.
In view of resource allocation schemes we observe: The world wide web (WWW), network computing (NC) and electronic commerce (EC) have been crucial factors in creating early problems of interconnective congestion on the Internet. This has given rise to pessimistic concerns on the ‘Tragedy of the Commons’ of resource use with a congestion type gridlock as a consequence . In a more optimistic technologicsl perspective congestion would not be considered a longer term issue on the belief that new fiber-optic cables on the Internet backbone would boost bandwidth in the foreseeable future together with wireless technologies.
In their otherwise detailed research on resource pricing of the Internet, Chinese authors Ku et al. (2014) were argueing that the ‘Tragedy of the Commons’ paradigm is applicable to the Internet where selfish behavior of the agents destroys the resource base of the Commons so that the aggregate costs (damages) to all interconnections would exceed the benefits. This (static) viewpoint puts the Internet into a public domain, servicing and pricing as a public utility where resource ‘rationing’ with commensurate pricing would be a proper tool to avoid the collaps on the Internet commons. However, in analogy to the Coasean view of resource allocation (Hurwicz, 1995), the Internet as an open domain and utilized by private agents through property rights would make market mechanism and efficient competitive pricing the proper conceptual mechanism design.In such a framework usage based pricing would be a more likely contender than flate rate pricing.
1.7. Competitive Bidding in Large Communication Markets
Prices in real-world communication markets cannot be updated continuously. The efficient price is determined by comparing a list of user bids to the available capacity and determing the cutoff price. In fact, packets arrive not all at once but over time, and thus it would be necessary to clear rhe market periodically based on some accumulation of bids. The efficiency of such a scheme then depends on how costly it is to frequently clear the market and on how persistent the periods on congestion are.
