Pricing and Efficiency in the Market for IP Addresses

by Benjamin Edelman & Michael Schwarz

Overview — Every device connected to the Internet—from PCs to tablets, printers to cash registers—needs an IP address. The current addressing standard, IPv4, uses addresses with 32 binary digits, allowing approximately 4 billion IP addresses. The world's centralized supply of unused IP addresses reached exhaustion in February 2011, and networks in most countries will soon find they cannot easily obtain additional IPv4 addresses. While addresses may now be bought and sold, the institutions and rules of these transfers are not yet well-developed. Nor have economic models examined the unusual characteristics of this market. Benjamin Edelman and Michael Schwarz model the market for IPv4 addresses, including evaluating novel rules intended to avoid possible harms from the purchase and sale of IP addresses, as well as predicting price trends. Key concepts include:

  • Facing limited availability of IPv4 addresses, growing or newly created networks have several options. Many growing networks will, in the short run, turn to IPv4 purchases to meet their v4 needs—prompting questions of the design of markets and institutions to facilitate such transfers.
  • While trade in IPv4 addresses promises various benefits, transfers also prompt concerns. Most common is the fear that certain address transfers might threaten the Internet's routing system—the systems that transfer data from one network to another. Suitable market rules can moderate these concerns.

Author 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 who 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 IPv4 addresses. In a world without uncertainty, the unit price of IPv4 is constant before the first time when all blocks of IPv4 addresses are in use and decreasing after that time. With uncertainty, the price before that time is a martingale, and the price trajectory afterwards is a supermartingale.

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