Explaining Internet Connectivity

This article provides a framework by which rival firms' incentives for interconnection in unregulated telecommunications markets may be analyzed and argues that the widespread voluntary interconnection observed among Internet service providers (ISPs) is anomalous when compared with examples of other similar markets from U.S. industrial history. However, the fact that it is anomalous provides an opportunity to test common explanations and to explore new explanations for the remarkable connectivity observed among ISPs through a comparative analysis. The comparative analysis reveals that (1) network effects and competitive forces in telecommunications markets will not necessarily drive firms to interconnect their networks voluntarily as there are other options to them, and (2) government actions played an important role in shaping the interconnection behavior competing firms in telecommunications markets. The article then explores some of the implications of these findings for telecommunications policy, and interconnection regulation in particular.