The Internet Market Structure: Implications for National and International Regulation

Internet connectivity may be seen as a composite good that is produced by the complementary inputs local and global access. In addition to the infrastructure components, software and content components affect the customers’ demand for connection to the Internet. While components such as local access, Internet connectivity, and electronic communication services are charged separately, the consumers’ demand is for the whole chain or system of components. Whereas the telecommunication incumbents seem to have market power in the input segment for local access, the global infrastructure is controlled by a limited number of American firms. Also in complementary segments such as content and software, there seem to be large companies with considerable market power. While access to the local input is domestically regulated both on price and quality, the complementary bottlenecks are unregulated. We argue that a cost oriented regulation of the local access input may be inferior to the domestic government in an open economy. A one-sided price regulation of the local input may lead to increased profit shifting to foreign countries. This underlines the importance of taking into account the interplay between complementary segments when the regulation policy is designed.