Do incumbents have incentives to degrade interconnection quality in the internet?

Abstract

In this paper we analyze the interconnection incentives for firms that have an installed base of customers and that also compete for new customers. We show that the small firm may be harmed in the competition for new customers if the customers in the installed bases are charged a high price, since this makes the large firm more aggressive. It is also shown that the price charged to the installed base customers affects the incentives that determine interconnection quality. A high price to the installed base may, or may not, make a high interconnection quality likely.