The Internet is provisioned selfishly by Internet Service Providers (ISPs), which results in economic inefficiency. We shed light on the sources of such inefficiency by means of a multi-commodity flow model of how ISPs interconnect and provision communications infrastructure to deliver an exogenous amount of demand. The outcome of the game ISPs play is a set of equilibrium networks sustained by interconnection prices computed assuming that transit markets are competitive. Our theoretical results show that equilibrium networks exist under mild assumptions. We also show that on the grounds of cost efficiency, ISPs have no incentive to split traffic flows thus choosing a single path for all the traffic flowing from a specific origin to a specific destination. Furthermore, we show that network provisioning inefficiency follows an inverted U-shaped curve as a function of the level of economies of scale. Simulation over small-sized networks confirms our theoretical results. Simulation also shows that ISPs enjoying higher levels of economies of scale in network provisioning become long-haul transit providers and regional ISPs depend on them to deliver their traffic. Using such a transit provider, who can benefit largely from economies of scale, reduces overall provisioning costs close to optimal.
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