The Internet and its predecessors (the Department of Defense's ARPAnet and the NSF's NSFNET) were funded by Federal government agencies, namely the Department of Defense and the National Science Foundation individual users have not been charged for their use of networks, and have not generally been aware of the impact of their use on network performance. Both the formulation as a joint market for information and bandwidth and the formulation as a market for bandwidth alone addresses the possibility that both the sender and the receiver have a preference for the receiver receiving information. The formulation as a market for bandwidth ignores what it is that users want to send through the Internet bandwidth is the only good considered, and can be considered solely from a sender's perspective. I will call this combination of information and bandwidth, communication. a joint market for information and for bandwidth. In other cases, it is beneficial to consider the task to be simultaneous allocation of both rights to information which can be sent over the Internet and the resources to be used for transmission, i. In some cases, it is suitable to consider the task to be allocation of communication resources, i. This paper examines proposed congestion pricing schemes allocating traffic on the Internet. The question of how the market for communication (e.g., bandwidth) and the market for information (e.g., files) are linked is addressed by exploring analogies with other network environments. The incidence of the communication cost (the manner in which the communication cost is shared between buyer and seller) is not a design choice: it is endogenous and depends only on the preferences of network users. The liability should be imposed so as to minimize such compliance costs. Different liability allocations will result in different compliance (accounting, collection, and verification) costs. The liability for communication costs (obligation to collect and submit the communication cost) may be imposed by the network owner on senders (sellers of information) and/or on receivers (buyers of information). Incidence and liability for communication (network usage) costs are two distinct issues. There are several means to discourage the monopolistic inefficiencies due to the withholding of capacity: by making congestion pricing a revenue neutral process by giving displaced users or their proxies the congestion fees, or by making users joint owners of the bandwidth resource and thus joint claimants to the congestion revenue, or by assessing both an access fee and a congestion fee (i.e., a two part tariff), or by having competition for bandwidth provision. Such a strategy of withholding capacity is analogous to the monopolist's strategy of choosing an output quantity smaller than that which corresponds to marginal cost intersecting the consumers' demand curve. Congestion can be caused by withholding capacity, which on the Internet, can be achieved by strategically not building capacity, or by hiding capacity from routers by deliberate non-advertisement of routes or by route blocking, or by self dealing whereby the owner of capacity buys back a portion of her own capacity. The recipient of congestion pricing revenue has an incentive to cause congestion in order to collect more revenue. A congestion pricing scheme will generate revenue only if demand for bandwidth at zero price exceeds the bandwidth capacity. Presented at MIT Workshop on Internet Economics March 1995 Abstract
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