Failure contagion and QoS elasticity in bandwidth markets

The objective of this paper is to test whether network failures will have serious economic consequences for participants in the newly developing bandwidth markets. We measure economic consequences by looking at changes in bandwidth prices, 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 (QoS) are perfect substitutes. Thus a local failure can affect alternative equivalent paths and this in turn can have a knock-on effect. We found that for a realistic large-scale market topology if there are, say, four failures per link per year, half of which are long enough to affect the market, then VAR is increased by 30%; and CVAR by 40%. This is true even with a spike size (×3) that is modest compared to observations in electricity markets (×10 to ×100). For 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. Even at 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