Failure Contagion and QoS Elasticity in Bandwidth Markets

Bandwidth markets are developing as telecommunications moves from proprietary networks to commodity status. The complex nature of today's communication networks and the fast pace of technology adoption have contributed to a rich history of failures, ranging from short-lived routing instability to long-lasting loss of connectivity. The objective of this paper is to test whether or not network failures will have serious economic consequences for participants in the newly developing bandwidth markets. We measure economic consequences by looking at changes in expected bandwidth prices, changes in value-at-risk (VAR) and in conditional-value-at-risk (CVAR). Bandwidth markets may be particularly sensitive to network failures because bandwidth is a non-storable commodity and because alternative paths with equivalent quality of service are perfect substitutes. Non-storability has contributed to enormous volatility in deregulated electricity prices and observations of enormous price spikes. Bandwidth is uniquely a true network commodity in that links in the network itself are the traded commodities. Thus a local failure can affect alternative equivalent paths and this can have a knock-on effect in turn. We used a spot market model incorporating non-storability and alternative path selection on price grounds and limited by quality of service (QoS) equivalence. Spike models are incorporated based on empirical data. We found that for a realistic large-scale market topology if there are, say, 4 failures per link per year, half of which are long enough to affect the market, then: expected link prices are increased 12%; VAR is increased by 30%; and CVAR by 40%. This is even with a spike size (x3) that is modest compared to observations in electricity markets (x10 to about x100). For market participants with capacity positions in such a market these consequences are likely to be serious. Thus if failures occur at this rate their consequence must be included in planning. Furthermore at even low failure intensities the network itself acts as a significant amplifier and thus cannot be neglected. This amplification is itself a true emergent phenomenon of a large-scale bandwidth market.