Contents of module
- Part One: Introduction to Interconnection
- Interconnection index
- eLearning main Index
Interconnect and Network Economics
In a competitive environment ‘network economics’ rests upon successful interconnection.
‘Network economics’ refers to the ‘externality’ that arises when the value of being on a public network is proportional to the number of possible connections or subscribers on that network. So when one new subscriber joins the network, all existing subscribers benefit as the number of possible connections has immediately multiplied.
Specifically, the maximum number of connections is expressed by the formula n(n-1) = (n2-n) where n is the number of subscriber lines on the network.
For example, if n = 3 connected persons on a telephone network, then 3(3-1) = 6 is the maximum permutation of possible call connections.
But note, not all these calls will take place simultaneously. For example, these three people will not be simultaneously calling each other. For that reason, there are practical limits to ‘network economics’, and for that reason multiple networks can compete and survive in a market.
If this were not the case, one network could serve all and the telecommunications network would be a natural monopoly due to economies of scale. In fact, not only are there practical limitations on ‘network economics’ due to the fact that not everyone is using the same service simultaneously, but there are limits due to the fact that different networks will offer a range of different services, such as store-and-forward fax, voice mailbox, call forwarding, and so forth.
Larger networks will benefit from economies of scope, but again not all networks will offer all services, and certainly not all services at exactly the same quality and price, so room for competitive networks exists, and competition sharpens up the service. We shall call the combined effects of economies of scale and economies of scope ‘network economies’.
Interconnection is the vital precondition for network competition to flourish. Without it smaller networks cannot achieve a critical mass of connections, and therefore new entrants cannot achieve network economies.
Not all services require interconnection. For example, voice mailbox does not, but many do, for example call forwarding where the forward number belongs to a different network.