Pricing and Network Externalities in Peer-to-Peer Communications Networks (Draft)

This paper analyzes the pricing of transit traffic in wireless peer-to-peer networks using the concepts of direct and indirect network externalities. We first establish that without any pricing mechanism, congestion externalities overwhelm other network effects in a wireless data network. We show that peering technology will mitigate the congestion and allow users to take advantage of more the positive network externalities. However, without pricing, the peering equilibrium breaks down just like a bucket brigade made up of free-riding agents. With pricing and perfect competition, a peering equilibrium is possible and allows many more users on the network at the same time. However, the congestion externality is still a problem, so peering organized through a club may be the best solution.