Working Knowledge
Business Research for Business Leaders
COVID-19 Business Impact Center
16 Mar 2009Working Paper Summaries

Running Out of Numbers: Scarcity of IP Addresses and What To Do About It

by Benjamin Edelman
Hidden from view of typical users, every Internet communication relies on an underlying system of numbers to identify data sources and destinations. Users typically specify online destinations by entering domain names (e.g. "congress.gov"). But the Internet's routers forward data according to numeric IP addresses (e.g. 140.147.249.9). To date, the Internet has enjoyed an ample supply of "IPv4" IP addresses, but demand is substantial and growing. Current allocation rates suggest IPv4 exhaustion by approximately 2011. A new numbering system, IPv6, would relieve scarcity, but incentives hinder transition: IPv4 works well for existing networks, and offers easier and simpler access to existing Internet content and services. As a result, to date few networks have begun to support v6. In principle regulators could order networks to implement v6, but the applicable Internet coordinating organizations lack authority or power to force such a transition. In the meantime, a market mechanism for v4 addresses offers important benefits, including allocating scarce v4 addresses to those who need them most, and putting a positive price on v4 space in order to encourage transition to v6. Thus, it seems v4 transfers can help both to mitigate the worst effects of v4 scarcity, and to build the incentives necessary for transition to v6. Key concepts include:
  • IPv4 scarcity will limit future expansion, hinder some technologies, and impose new costs on networks and users.
  • Engineers have developed a new numbering system, IPv6, which offers many more possible addresses than the current IPv4 address system. But incentives hinder transition.
  • An IP address "market" for the paid transfer of IP addresses could offer important benefits and avoid the worst effects of v4 scarcity.

Author Abstract

The Internet's current numbering system is nearing exhaustion: Existing protocols allow only a finite set of computer numbers ("IP addresses"), and central authorities will soon deplete their supply. I evaluate a series of possible responses to this shortage: Sharing addresses impedes new Internet applications and does not seem to be scalable. A new numbering system ("IPv6") offers greater capacity, but network incentives impede transition. Paid transfers of IP addresses would better allocate resources to those who need them most, but unrestricted transfers might threaten the Internet's routing system. I suggest policies to create an IP address "market" while avoiding major negative externalities - mitigating the worst effects of v4 scarcity, while obtaining price discovery and allocative efficiency benefits of market transactions. Keywords: Market design, IP addresses, network, Internet.

Paper Information

    Find Related Articles

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.