Diversification, Market Entry, and the Global Internet Backbone

Abstract In many industries, buyers diversify their supplier base to manage supplier disruption risk. We investigate the importance of such diversification as a determinant of demand and supplier entry in the context of the internet backbone, the worldwide network of undersea fibre-optic cables that underpins the internet. We specify a model of international bandwidth demand and cable operators’ dynamic entry and supply choices. The model is estimated using novel data on cross-border data flows, prices, cable characteristics, and disruptions. Counterfactual analysis reveals that supplier diversification accounts for a large share of entry and surplus created between 2005 and 2021. Relative to the socially optimal level of entry, distortions due to suppliers’ inability to capture fully the social benefits of diversity are as large as distortions due to business stealing.