Network Economics and the Allocation of Savings: A Model of Peering in the Voice-over-IP Telecommunications Market

306 Pages·2012·2.63 MB·English

by  Philipp Servatius (auth.)

Lecture Notes in Economics
and Mathematical Systems 653
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Philipp Servatius
Network Economics
and the Allocation
of Savings
A Model of Peering in the Voice-over-IP
Telecommunications Market
123
PhilippServatius
Universite´deFribourg
DepartmentofQuantitativeEconomics
Bd.dePe´rolles90
1700Fribourg
Switzerland
[email protected]
ISSN0075-8442
ISBN978-3-642-21095-2 e-ISBN978-3-642-21096-9
DOI10.1007/978-3-642-21096-9
SpringerHeidelbergDordrechtLondonNewYork
LibraryofCongressControlNumber:2011936793
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In lovingmemoryof PoldiReinl
22.11.1977– 28.12.2007

Preface
The author would like to express the utmost gratitude to everybody who has
contributedtothis thesisin oneway oranother.As thereare certainlymanymore
such individuals than I could reasonably accommodate here, I list only the most
immediateones.
Firstandforemost,Iwouldliketothankmymother,BrigitteServatius.Shehas
alwaysofferedheradviceandsupportedmyendeavors,mostimportantlybyletting
allfinaldecisionsrestwithme.Growingup(thoughsomechallengethisisindeed
accomplished)she gavemeallthe offreedomI desiredandwith itthegreatestof
allgoods:TheconfidencethatIwouldchoosetodotherightthing,or,asoftenas
thiscouldnotbedeterminedapriori,avoidobviouslywrongchoices.Lookingback,
Icouldnothavewantedmuchmore.
Next, I want to thank all my of close friends. Countless hours spent in their
company pushed my productivity and endowed me with the necessary energy to
endure.Namesshallnotbenecessary,youknowwhoyouare.
Also, I am very grateful for the support of my colleagues at the various
institutionsthatcontributedto mydoctoraleducation.InparticularIwouldliketo
mentionDr.Kazuhiko“Shiofuki”Kakamu,withwhomInotonlysharedanofficeat
theInstituteforAdvancedStudiesinViennabutalsoencounteredmanychallenges
there. No less Dr. Barbara von Schnurbein, ne´e Styczynska, my colleague at the
ChairofMicroeconomicsinFribourg;toherIamindebtedformanyaconstructive
criticismandforanatmosphereinourofficethatwassecondtonone.AlsoDanielle
Martin, then assistant at the Chair of Statistics, who has occasionally let me take
advantageof her superb math skills should notgo unmentioned.The same is true
forBobo,SutiandYolanda.
ThisdissertationwasfinalizedwhilevisitingECARESattheUniversite´Librede
Bruxelles in Belgium, a stay financed by the Swiss National Science Foundation.
To the latter I am most grateful for the generous scholarship. For the convivial
atmosphere that welcomed me at ECARES, I would like to thank Prof. Georg
Kirchsteiger,whoinvitedmetovisit,andallofmycolleaguesthere.
vii
viii Preface
Lastbutcertainlynotleast,myadvisorsdeservemorethanjustpraise:Itishard
todescribewhatI owetomyfirstadvisor,Prof.Reiner Wolff.Becausehe didnot
restrain my research agenda in any way, my curiosity was fueled to a point that
leadtosomethingprobablyneitherofushadimaginedwhenIstartedinFribourg.
This was certainly facilitated by the fact that I had never been overburdenedwith
administrative work (far from it to be honest). I am especially grateful for his
painstakingandmeticulousrevisionofthisdissertation’sfirstdraft.Itcouldhardly
havebeenmoredetailed.Mysecondadvisor,Prof.HansWolfgangBrachinger,also
deservesmygratitudeandagooddealmore.Heneverdeclinedanyofmyrequests
and supported me on all academic and extracurricular fronts, especially when it
matteredmosttome.
But despite all of the helpful input I have received, some errors are bound to
remain in this document. Needless to say, the responsibility for these is entirely
mine.
Fribourg&Zurich PhilippM.Servatius
April2011
Contents
1 MotivationandNontechnicalOverview .................................. 1
PartI SelectedTheoreticalConcepts
2 TheTheoryofGames....................................................... 9
2.1 OnGameTheory....................................................... 9
2.2 NoncooperativeGames................................................. 11
2.2.1 Overview ....................................................... 11
2.2.2 StrategicFormGames ......................................... 11
2.2.3 ExtensiveFormGames ........................................ 21
2.3 CooperativeGames..................................................... 26
2.3.1 Overview ....................................................... 26
2.3.2 TheCooperativeGame ........................................ 27
2.3.3 ImportantClassesandTypesofGames....................... 29
2.3.4 PropertiesofaGame........................................... 36
2.3.5 DualGamesandtheTennesseeValleyAuthority ............ 45
2.4 SolutionsConceptsforCooperativeGames........................... 48
2.4.1 Overview ....................................................... 48
2.4.2 StableSets:ThevonNeumannMorgensternSolution....... 52
2.4.3 TheCore........................................................ 57
2.4.4 AllocationRulesasPoint-valuedSolutions................... 85
2.4.5 TheShapleyValue ............................................. 90
2.4.6 TheWeightedShapleyValue.................................. 102
2.4.7 BargainingSolutions........................................... 111
3 NetworkTheoryinEconomics............................................. 119
3.1 Overview................................................................ 119
3.2 BasicConceptsandDefinitions........................................ 119
3.3 CommunicationSituations............................................. 124
3.4 AllocationRulesinCommunicationSituations....................... 130
3.5 TheMyersonValue..................................................... 134
ix
x Contents
3.6 NetworkFormation..................................................... 141
3.6.1 Overview ....................................................... 141
3.6.2 NetworkFormationinExtensiveForm ....................... 142
3.6.3 NetworkFormationinStrategicForm ........................ 147
3.6.4 OntheStabilityofNetworks .................................. 151
PartII ApplicationstoPeeringinTelecommunications
4 TelecommunicationsandtheInternet..................................... 159
4.1 Overview................................................................ 159
4.2 ABriefRefresheronTelecommunicationsNetworks................ 159
4.2.1 ArchitectureofaClassicPSTN ............................... 160
4.2.2 TheInternet..................................................... 163
4.2.3 OverlapandConvergencetoNextGenerationNetworks..... 166
4.3 MarketLiberalizationandRegulation................................. 167
4.4 TelephonyonIP-BasedNetworks..................................... 170
4.4.1 IPTelephony ................................................... 170
4.4.2 ClassesofVoIPFirms.......................................... 172
4.4.3 TheRe-RoutingProblem...................................... 172
4.5 RelatedResearch ....................................................... 175
5 AModelofPeeringAmongVoIPFirms.................................. 179
5.1 Overview................................................................ 179
5.2 TheVoIPPeeringGame................................................ 179
5.2.1 BasicSetupandAssumptions................................. 179
5.2.2 TheCharacteristicFunctionoftheGame..................... 189
5.2.3 ThePeeringGameandItsProperties ......................... 193
5.3 AllocationofGainsfromPeering ..................................... 203
5.3.1 AllocateWhat?................................................. 203
5.3.2 TheCoreofthePeeringGame ................................ 204
5.3.3 DownsizingwiththeLeast-Core .............................. 211
5.3.4 TheShapleyVectorinthePeeringGame..................... 213
5.3.5 TheMyersonValue ............................................ 218
5.3.6 TheWeightedShapleyValue.................................. 219
5.3.7 BargainingSolutions........................................... 226
5.3.8 ForComparisonOnly.......................................... 232
6 NetworkFormationinPeering............................................. 235
6.1 Overview................................................................ 235
6.2 AContribution-BasedAllocationProcedure.......................... 236
6.3 BilateralNetworkFormation .......................................... 241
6.3.1 Overview ....................................................... 241
6.3.2 NetworkFormationinStrategicForm ........................ 242
6.3.3 StabilityofNetworks .......................................... 249
6.3.4 NetworkFormationinExtensiveForm ....................... 253