On the internet, diversification, and economic trends: U of T Researchers examine the influence of diversification on the internet industry and more

Researchers at the University of Toronto Mississauga Department of Management and the Rotman School of Management have recently posted a paper outlining and investigating how economics, technological innovation, and the international internet bandwidth all influence each other in defining the dynamic landscape of industries. In their paper, titled “Network Diversity, Market Entry, and the Global Internet Backbone”, assistant professors El Hadi Caoui and Andrew Steck research whether supply disruptions and the resulting diversification by buyers have any quantifiable impact on supplier investment, and how this diversification influences market competition. Steck, who has a background in industrial organization and the economics of innovation, summarizes that the “aim of the research is twofold: first, to quantify how much the ‘demand for diversification’ has impacted the building of new underwater fiber-optic internet cables, [and secondly], to assess whether/how far/in which direction the competitive market outcome we see today departs from a theoretically socially optimal market configuration.” 

But what do terms such as “diversification”, “global internet bandwidth”, and “market entry” really mean? The central focus of Caoui and Steck’s work is on how different factors affect the underwater cables that support the functioning of our modern information age. Underwater cables form vast network connections that allow for data to be transmitted with efficiency and speed; according to Steck, the “global internet backbone is a nickname for the network of underwater fiber optic cables that carry 99% of international internet bandwidth”, with “bandwidth” referring to the maximum amount of data a network can transmit. Because undersea cables frequently experience disruptions, factors such as diversification and market entry play an important role in the building and success of these cables. Market entry is simply the introduction of a new “entity”, in this case, cable, into a market. Moreover, Caoui and Steck’s research examines diversification; which is the “practice of buyers of bandwidth choosing to spread their purchases across many carriers/cables on a given route – in case one cable gets disrupted, most of their traffic can still get through”, says Steck.  

Why was the global internet backbone the industry of choice for this study? According to Steck, there are two reasons why the internet industry was of importance: “first, it is an important industry in its own right [and internet cables themselves] are a key part of the internet supply chains, [which] has not been studied closely in prior economics literature.” The other reason being that there was robust data was available; “prices and quantities that let [the researchers] estimate [their] econometric models with a high degree of precision.  We find that the need for buyers to diversify is an important determinant of suppliers’ (in this case cable operators) incentives to build new infrastructure.   

Caoui and Steck have already made strides in filling important gaps in this area of economics research, but more questions still remain unanswered in the light of a fast-paced and evolving technological world. For instance, how does the recent phenomenon of large internet companies building and operating their own cables affect market competition? They have recently composed a preliminary working paper exploring this question, which may be of interest to regulators of internet companies and market competition.  Caoui and Steck are also in the process of expanding on the insights of this research, which may have implications far beyond the undersea cable industry.  For now, Steck comments that “insights from our model are relevant not only to future work in this industry, but many other industries where related dynamics might be at play.”