Working Paper | HBS Working Paper Series | 2014

Pricing and Efficiency in the Market for IP Addresses

by Benjamin Edelman and Michael Schwarz

Abstract

We consider market rules for the transfer of IP addresses, numeric identifiers required by all computers connected to the Internet. Excessive fragmentation of IP address blocks causes growth in the Internet's routing table, which is socially costly, so an IP address market should discourage subdividing IP address blocks more than necessary. Yet IP address transfer rules also need to facilitate purchase by the networks that need the addresses most, from the networks that value them least. We propose a market rule that avoids excessive fragmentation while almost achieving social efficiency, and we argue that implementation of this rule is feasible despite the limited powers of central authorities. We also offer a framework for the price trajectory of IP addresses. In a world without uncertainty, the unit price of IP addresses is constant until all addresses are in use and begins to decrease at that time. With uncertainty, the price before that time is a martingale, and the price trajectory afterwards is a supermartingale. Finally, we explore the role of rental markets in sharing information about address value and assuring allocative efficiency.

Keywords: Price; Governing Rules, Regulations, and Reforms; Markets; Performance Efficiency; Internet; Technology Networks; Technology Industry; Telecommunications Industry;

Citation:

Edelman, Benjamin, and Michael Schwarz. "Pricing and Efficiency in the Market for IP Addresses." Harvard Business School Working Paper, No. 12-020, September 2011. (Revised November 2012, June 2013, April 2014.)