A Monopolistic ISP's Approach to Paid Peering: Insights from a Two-Sided Market Model

Debates over paid peering and usage fees have expanded from the United States to Europe and South Korea. A key part of the debate concerns whether the ISP sets the peering price based on costs incurred by the large video service providers or if it instead reflects the ISP's market power and monopolistic control over end-users. This question gains significance in light of the recent Federal Communications Commission (FCC) decision to reconsider the reinstatement of net neutrality rules. In this paper, we determine the peering price that maximizes an ISP's profit using a two-sided market model in which a profit-maximizing ISP determines broadband prices and the peering price, and in which content providers determine their service prices based on the peering price. Our findings reveal that ISPs, when driven by profit-maximization motives, tend to set a peering fee that is sub-stantially above cost, often reaching the upper limit of what content providers are willing to pay. Additionally, our model sheds light on the influence of various factors, such as the number of interconnection points and the level of traffic localization, on the determination of an ISP's proflt-maximizing peering price.