  Internet users have suffered collateral damage in tussles over paid peering
between large ISPs and large content providers. In order to qualify for
settlement-free peering, large Internet Service Providers (ISPs) require that
peers meet certain requirements. However, the academic literature has not yet
shown the relationship between these settlement-free peering requirements and
the value to each interconnecting network.
  We first consider the effect of paid peering on broadband prices. We adopt a
two-sided market model in which an ISP maximizes profit by setting broadband
prices and a paid peering price. Our result shows that paid peering fees reduce
the premium plan price, and increase the video streaming price and the total
price for premium tier customers who subscribe to video streaming services.
  We next consider the effect of paid peering on consumer surplus. We find that
consumer surplus is a uni-modal function of the paid peering fee. The peering
price depends critically on the incremental ISP cost per video streaming
subscriber; at different costs, it can be negative, zero, or positive.
  Last, we construct a network cost model. We show that the traffic-sensitive
network cost decreases as the number of interconnection points increases, but
with decreasing returns. Interconnecting at 6 to 8 interconnection points is
rational, and requiring interconnection at more than 8 points is of little
value. We show that if the content delivery network (CDN) delivers traffic to
the ISP locally, then a requirement to interconnect at a minimum number of
interconnection points is rational. We also show that if the CDN delivers
traffic using hot potato routing, the ISP is unlikely to perceive sufficient
value to offer settlement-free peering.
