The Impact of the General Data Protection Regulation on Internet Interconnection

The Internet comprises thousands of independently operated networks, where bilaterally negotiated interconnection agreements determine the flow of data between networks. The European Union’s General Data Protection Regulation (GDPR) imposes strict restrictions on processing and sharing of personal data of EU residents. Both contemporary news reports and simple bilateral bargaining theory predict reduction in data usage at the application layer and would negatively impact incentives for negotiating interconnection agreements at the internet layer due to reduced bargaining power of European networks and increased bargaining frictions. Considerable empirical evidence at the application layer confirms this prediction. Using a large sample of interconnection agreements between networks around the world in 2015–2019, we empirically investigate the impact of the GDPR on interconnection behavior of network operators in the European Economic Area (EEA) compared to network operators in non-EEA OECD countries. All evidence estimates precisely zero effects across multiple measures: the number of observed agreements per network, the inferred agreement types, and the number of observed IP-address-level interconnection points per agreement. We also find economically small effects of the GDPR on the entry and the observed number of network customers. We conclude that the short-run costs for GDPR are concentrated at the application layer.