Interconnection agreement between internet service providers and the optimal policy intervention: The case of Cournot-type competition under network externalities

Hyun Soo Ji, Ichiroh Daitoh

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We derive the optimal subsidy policy for an interconnection agreement between two symmetric Internet service providers (ISPs) competing á la Cournot in a network service market. The interconnection quality agreed upon is lower than the socially optimal level, as suggested by Crémer et al. (2000). In the basic model where both ISPs compete in the domestic market, the optimal investment subsidy rate depends positively on the strength of network externalities. In the extended model where home and foreign ISPs compete in the home market, the optimal subsidy rate for the home government is higher than in the basic model.

Original languageEnglish
Pages (from-to)228-240
Number of pages13
JournalJapanese Economic Review
Issue number2
Publication statusPublished - 2008 Jun 1


ASJC Scopus subject areas

  • Economics and Econometrics

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