Economic Effects of Multi-Homing and Content Delivery Networks on the Internet

Peering points between different network providers are among the bottlenecks of the Internet. Two technical solutions to bypass them are content delivery networks (CDN) and multihoming (MH). While quality of data delivery can thus be improved, there is no research that analyses the economic effects of those technologies on the Internet. This paper argues that CDNs and MH reduce the commodity nature of data being transported on the Internet and put terminating Internet service providers (ISPs) in a position to engage in price discrimination. By formalizing CDNs and MH as facilitators of price discrimination we show that in a static model with locked in end users and paid content ISPs will exploit their market power and generate profits. As a consequence ISPs have incentives to degrade ordinary peering quality and shift demand to higher quality methods of access to EUs such as CDN and MH.