Network Diversity, Market Entry, and the Global Internet Backbone

In supply networks, path diversity is an important determinant of demand, entry, and firms’ market power. We investigate this role in the context of the internet backbone, the worldwide network of undersea fiber-optic cables that underpins the internet. We specify a model of inter-regional bandwidth demand and cable operators’ dynamic entry and supply choices. The model is estimated using novel data on cross-border data flows, prices, and cable characteristics. Counterfactual analysis reveals that preferences for path diversity account for a large share of entry rates and surplus created between 2005 and 2021. Relative to the socially optimal level of entry, distortions due to entrants’ inability to capture fully the social benefits of diversity are as large as distortions due to business stealing