Towards sustainable quality of service in interconnection agreements: Implications from information asymmetry

This paper analyses the structure of the Internet marketplace and the business relationships of key players involved in network services provision. A brief overview of existing pricing policies and research work in this area is presented and some new issues are introduced. We believe that the role of information asymmetry is critical when considering agreements for Internet access and interconnection. In negotiation and contract preparation, information asymmetry gives rise to adverse selection. The current structure of connectivity agreements does not address information asymmetries thus allowing the possibility of opportunistic behaviour in the form of moral hazard. Inasmuch as interconnection agreements involve sharing and/or exchanging network resources, either party will tend to exploit the agreement to its own advantage (i.e. conserving its own resources) and, possibly, to the detriment of the other (i.e. over-utilising the other’s resources). The discussion focuses on interconnection agreements between Internet Service Providers, namely peering and transit. The paper concludes with an outline of an incentive compatible mechanism that can sustain quality of service requirements in interconnection agreements.