Table Of ContentLecture 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
©Springer-VerlagBerlinHeidelberg2012
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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
Description:This book provides a game theoretic model of interaction among VoIP telecommunications providers regarding their willingness to enter peering agreements with one another. The author shows that the incentive to peer is generally based on savings from otherwise payable long distance fees. At the same
