Yesterday, the Nobel Prize in Economics was awarded to Frenchman Jean Tirole "
for his analysis of market power and regulation." At 61, Tirole is young among winners of the Economics Noble Prize; however there is no doubt that his work in industrial economics and game theory has revolutionized the understanding of many industries, including Internet-based businesses, telecommunications, advertising, banking, and finance. In their explanation of the award, the Nobel Committee
observed, “no other scholar has done more to enhance our understanding of industrial organizations in general, and of optimal policy interventions in particular.”
Generally, as long as traffic flows are fairly symmetrical, parties exchange traffic on a settlement-free basis. However, when this traffic exchange is no longer balanced, it is common (and reasonable) for the sending party to pay a fee to offset the incremental cost of the traffic.
Netflix is one such content provider with an outsized amount of traffic; it offers a streaming service that consumes one-third of the network’s capacity and frequently impinges on other, non-Netflix users’ ability to enjoy the network. Because Netflix subscribers are a small portion of any one network’s user base, the ISP would like Netflix to participate in the cost of delivering the service, so that the ISP does not have to impose the cost across all its subscribers, especially those that do not want or need to binge-watch the latest season of “House of Cards.”