Internet DRAFT - draft-ietf-cidrd-blocks

draft-ietf-cidrd-blocks





CIDRD Working Group                                Paul Resnick
Internet Draft                                             AT&T
                                              February 22, 1996


  Suggestions for Market-Based Allocation of IP Address Blocks
              <draft-ietf-cidrd-blocks-00.txt>

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This draft expires August 22, 1996.

ABSTRACT

Market-based allocation of the existing 32-bit address space will 
offer several advantages as unallocated space becomes scarce. Most 
importantly, addresses will be allocated to those who value them 
most. In addition, address allocations will adjust more quickly to 
changes in network topology or utilization efficiency. A registry 
will still be required, much like a registry of deeds for real 
estate, but the registry would no longer make allocation 
decisions.

1. ADDRESS ALLOCATION TODAY

The 32-bit address space used in IPV4 has been and continues to be 
allocated through an administrative process. Internet Service 
Providers and other organizations submit applications to the 
InterNIC or a delegated registry such as RIPE. The main criterion 
for accepting or rejecting an application is efficient utilization 
of the requested block [1]. The registries take great care not to 
assign the same address to two different organizations. The 
Internet Service Providers may in turn delegate number assignments 
to customers. Occasionally, ISPs go out of business or 
organizations stop using certain address blocks and voluntarily 
return them to a registry for reassignment.

Assignees do not pay for the numbers they receive. The InterNIC 
itself is subsidized by the NSF. This panel is supposed to propose 
methods of making the InterNIC self-supporting. I propose to 
remove one of the functions of the InterNIC registration services 
to a free market, leaving a much restricted function that will be 
less costly to run.

2. WHAT'S WRONG?

One weakness of the existing procedure is that there are no 
incentives to return address blocks for reassignment to other 
organizations that may be able to make better use of them. Over 
time, an organization's needs may change and the address block may 
become underutilized. The network topology may also change, so 
that routing would be far more efficient if an address block were 
reassigned. A convincing argument for the need to adjust address 
allocations over time appears in [2]. 

A second weakness will surface as the address space becomes 
scarce. Approximately half of the addresses have been assigned so 
far, with the exact amount depending on one's definition of 
assignment 
(ftp://ds.internic.net/netinfo/ip_network_allocations.95Nov). 
Extrapolations from current trends indicate that the space will 
last until sometime in the next decade (ref. Tony Li's graphs.) As 
the unassigned space becomes scarcer, the evaluation criteria for 
new requests are likely to become stricter.  The registries will 
come under increasing pressures from commercial interests, 
political lobbying groups, and governments. Caving in to these 
pressures will result in sub-optimal allocations while resisting 
them may be a Herculean task. Running the registries in those 
circumstances will be neither cheap nor fun, though it may be 
profitable if corruption creeps into the system.

3. POTENTIAL SOLUTIONS

One obvious way out of this impending predicament is to alleviate 
the scarcity, and several technical approaches are in the works. 
First, CIDR permits registries to tailor the size of an allocation 
more closely to the number of hosts that will be connected. Prior 
to CIDR, organizations that needed more than a single class C were 
routinely allocated an entire class B. Now, an organization can be 
assigned four class Cs that form a CIDR /22 for routing purposes. 
Second, some organizations are using designated IP addresses that 
are not globally unique, so that they do not need to request a 
globally unique allocation for all their internal computers [3]. 
Finally, IPV6 will introduce longer addresses, yielding a much 
larger address space [4]. Still, the prospect of IPV4 address 
scarcity is quite real, as indicated by the registries ongoing 
policies of conserving space for potential future requests.

If scarcity cannot be eliminated, allocation decisions should be 
moved out of the political realm and into the economic realm, 
which can handle scarcity more gracefully. If we want to maximize 
social utility, addresses should be assigned to those who derive 
the most value from them. Some organizations will value addresses 
more than others and organizations will value particular address 
blocks differently, due to routing considerations and due to the 
costs of renumbering away from addresses currently in use.

4. TRANSFERABLE OWNERSHIP

No system of central planning will be able to take into account 
all the local variations necessary to optimally allocate (and 
reallocate) addresses. Instead, we should empower local decision 
making. The Internet community has already taken one step in that 
direction, by permitting ISPs to delegate numbers that have been 
assigned to them. We should continue along that path by allowing 
and encouraging ISPs to exchange entire large blocks with each 
other.

The simplest method is to invest ISPs and other organizations with 
a limited set of property rights over addresses. In particular, 
two rights would come with ownership of an address:

1. Exclusive use. No one else is permitted to advertise that 
address for routing purposes on the public Internet.

2. Right of transfer. At the organization's discretion, it can 
transfer the first right to another organization, in return for 
whatever compensation, including monetary compensation, that it 
is able to negotiate. Organizations may also temporarily 
transfer rights, in the form of a lease [2].

An Internet-wide registry of deeds would still be required, to 
resolve ownership disputes. This would be a slightly different 
function than that served by today's InterNIC. The registry would 
not serve any allocation function: it would not review 
applications and assign blocks. The registry would merely record 
each transfer of property rights. This registry should be less 
expensive to run than the existing InterNIC registration service, 
and could be accomplished purely by computer. It may also be 
possible to distribute this service, permitting multiple 
registries of deeds to share a common database. These registries 
could then be offered on a pay-for-service basis, and compete with 
each other on price or quality of service.

5. ROUTING IMPLICATIONS

Note that there is no "right to routing" that comes with address 
ownership. Others are prevented from using the address for routing 
on the public Internet, but the address owner may need to make 
separate arrangements to ensure that traffic destined for that 
address is routed properly to a machine that it chooses. In 
particular, some ISPs may only route for large aggregate address 
blocks, so that ownership of a single IP address may not be very 
valuable. It may be more valuable to own a single /18 than to own 
64 separate /24 addresses because almost everyone is currently 
willing to include a /18 in router tables. That means that an 
organization can switch ISPs and still continue to use the same 
/18 address block.

The idea of charging for router table entries or BGP traffic has 
been floating around the IETF community for a while and is now 
receiving serious consideration in the cidr working group. Such 
charging mechanisms could mesh well with this proposal. Given 
current technologies, we have to make tradeoffs among the worthy 
goals of small router tables, route optimization, efficient 
address space utilization, and address portability. Since the 
costs of renumbering or of suboptimal routes vary between 
organizations, separate charges for addresses and for routing will 
provide incentives for organizations to make appropriate 
tradeoffs. In fact, it may be that neither charging mechanism will 
work well without the other: mixing market-based decisions with 
administrative ones may lead to sub-optimal decisions in both 
address allocation and routing.

One effect of routing charges will be to create a premium price 
for large address blocks, which has a couple of implications. 
First, most of the market participants are likely to be large 
organizations and ISPs. Most small customers will continue to 
purchase a service from ISPs that combines lease of addresses with 
routing privileges. Second, there are likely to be ISPs (or even 
speculators) who purchase specific blocks to complete larger CIDR 
blocks.  This is analogous to lot assembly for large building 
construction. The assembly service is valuable to the Internet as 
a whole, because it simplifies routing, and the premium price for 
larger blocks will offer appropriate incentives to those who 
perform it.

6. INITIAL ALLOCATION

If we are to switch to a system of transferable property rights, 
the question naturally arises of who should own the addresses 
initially. Many would argue that all the addresses are currently 
owned by the community as a whole, and merely loaned to their 
current assignees. Others would argue that the current assignees 
should be granted ownership. In any case, there are unallocated 
and unassigned addresses and some organization would need to be 
given initial ownership of them. 

Decisions about who initially gets property rights to addresses 
will impact wealth distribution, especially if addresses become 
scarce and trade at high prices. Those who obtain large initial 
property rights may enjoy a windfall. Fortunately, however, the 
initial allocation should have little impact on whether an optimal 
allocation is achieved. In a famous paper, Coase pointed out that 
as long as exchanges are easily arranged, property will eventually 
end up in the hands of those who value it most, regardless of who 
owns it initially [5]. If the government of Burundi receives a 
large initial allocation but has few computers it wishes to attach 
to the Internet, it should sell or lease the addresses to someone 
who can make better use of them. Fairness and social justice, 
then, should be the primary criteria for deciding initial 
allocation of property rights.

As the least disruptive option, I suggest that property rights be 
given to current assignees. It would be up to ISPs to negotiate 
with their customers over ownership of the addresses they have 
reassigned in the past or reassign in the future. IANA or other 
bodies may choose to retain ownership of some blocks. The 
remaining unassigned blocks would be auctioned off, just as the 
U.S. FCC recently auctioned off spectrum for wireless 
communication. That auction should be designed carefully, but I do 
not address its design in this paper. Then there is the problem of 
who gets the proceeds from the auction. Some might be retained by 
a body such as the Internet Society or the IETF for future use 
that benefits the entire network. If the proceeds are very large, 
it may be appropriate to donate them to some international 
organization. 

7. ELECTRONIC MARKET ADVANTAGES

To encourage transfers of ownership whenever such transfers are 
mutually beneficial, it may be desirable to form new market-making 
institutions. The market will enable interested buyers and sellers 
to find each other. It can also help in what economists call 
"price discovery," the identification of a common market price for 
similar goods.

Price discovery is useful for two reasons. First, for those in the 
market, a well known "going price" avoids the need for bilateral 
negotiations. A well-known theorem in economics [6] argues that, 
when neither buyer or seller is sure how much an item is worth to 
the other party, there is no very good price setting mechanism. 
Either the buyer will bid lower than his true value or the seller 
will demand more than her true value, and usually both. Not only 
is much energy wasted, but skillful negotiators will sometimes 
miss a mutually beneficial exchange because they are jockeying to 
get the best price.

Price discovery is also useful for those not in the market. A 
well-known "going price" permits other organizations to decide 
whether or not to enter the market, and to plan for the future. In 
the case of IP address blocks, it will provide useful signals 
about how much should be invested in technologies that alleviate 
scarcity. For example, if IP address blocks are selling for a high 
price, there will be an incentive for the creation of renumbering 
tools, so that organizations that are underutilizing their address 
blocks will be able to consolidate cheaply and sell off some of 
their blocks. High address prices may also hasten the deployment 
of IPV6.

It is possible to introduce price-based incentives into the 
administrative allocation process without turning completely to 
market based allocation. Registries could lease address blocks for 
a fee, as suggested in [7]. Such an approach, however, misses the 
opportunity for price discovery. Unless the registries conduct 
auctions for leases, they will not know the optimal prices to set 
and hence the self-selections that ISPs make based on those prices 
will not lead to an optimal allocation.

8. MARKET DESIGN GOALS

The market-maker that facilitates exchanges can be a private party 
not affiliated with the InterNIC. There can be competition among 
market-makers, based on the cost of transactions, speed, and other 
factors. The primary goal of anyone designing such a market should 
be facilitate all and only those exchanges that are mutually 
beneficial. 

An area of theoretical economics devoted to designing such markets 
is called "mechanism design." A mechanism is a set of rules for 
submitting bids and offers and for resolving those bids to match 
buyers and sellers and determine prices. If the buyers honestly 
reveal the maximum price they are willing to pay and the sellers 
honestly reveal the minimum price they will accept, it is 
straightforward to arrange an optimal set of exchanges. The 
problem is that the rules for determining prices may give buyers 
and sellers incentives to make bids that do not reflect their true 
values.

One well-known mechanism that does encourage honest revelation is 
called a second-price auction. It can be used when there are many 
buyers, but just one seller selling a single product. Each buyer 
seals a bid in an envelope. All bids are opened simultaneously. 
The highest bidder gets the product, but pays a price equal to the 
second highest bid. The amount of your bid determines whether you 
will win the auction, but has no impact on the price you'll pay, 
so there is no point in bidding anything other than your true 
value.

The market for IP addresses may be slightly more complicated. 
There are many possible address block sizes for sale and there are 
complementarities among blocks. As suggested above, a set of 16 
contiguous class C addresses that can be assembled into a single 
/20 CIDR block will likely sell for more than 16 scattered class C 
addresses. Thus, the mechanism choice for an IP address market 
will be an interesting research problem for economists and network 
engineers to solve together.

9. POTENTIAL MARKET FAILURES

The arguments above have assumed a somewhat idealized situation of 
a perfectly functioning market. Market participants are 
knowledgeable, transaction costs are negligible, there is no abuse 
of market power, there are no externalities, and equity concerns 
can be separated from efficiency concerns. In reality, these 
assumptions may be violated to a greater or lesser extent.

First, if market participants are not knowledgeable, they may make 
suboptimal decisions for themselves. The government of Burundi may 
sell its initial allocation of addresses at a low price, not 
realizing that in a few years it will want those addresses. 
Organizations that do not understand the importance of route 
aggregation may buy small address blocks on the open market and 
then find that ISPs will not route traffic to those addresses. In 
such situations, the registries may be better at determining the 
value of address blocks to individual organizations than those 
organizations are. If, however, the market is mostly for trading 
among large organizations and ISPs, it is reasonable to expect 
them to understand their particular circumstances better than any 
central administrative authority will.

Second, if transaction costs are high, such as the cost of 
negotiating a price or registering a transfer with the registry of 
deeds, suboptimal allocations are likely to continue. There is no 
reason, however, for these costs to be high. Note that renumbering 
costs should not be viewed as transaction costs: if an 
organization uses an address block sparsely but has high 
renumbering costs, its actual value for the address block may be 
quite high, and it may be optimal for that organization to 
continue using the addresses sparsely.

Third, there may be a concentration of market power. Geoff 
Huston's analysis of address allocation is similar to that 
presented here, but he views market-based exchange as something to 
be avoided, because ISPs might act as an oligopoly to erect 
barriers to entry for newcomers [7]. As the number of competitors 
increases, however, they are more likely to compete than to 
collude. A related problem is the possibility of speculators 
acquiring large numbers of addresses and keeping them off the 
market in an attempt to create artificial scarcity that drives up 
prices. Cornering the market in this way is a difficult strategy 
to implement, but it is a real danger to the community. The market 
may need to be governed by securities exchange laws such as those 
that govern the U.S. securities and commodities markets. 
Alternatively, since "ownership" exists only by mutual agreement 
of other parties, perhaps the IANA or the ISPs would retain the 
right to confiscate and reallocate addresses that are withheld 
from the market in an attempt to drive up prices artificially.

Fourth, there are wealth distribution questions. Suppose that a 
university in Thailand is willing to spend $100 for a block of 
addresses, but a large company is willing to spend $500 for those 
addresses, to be used for profit-making purposes. It is tempting 
to say that willingness-to-pay is a poor measure of which use is 
more valuable, especially if the university has less wealth to 
spend. Questions of wealth distribution and equity, however, 
should not be confused with allocative efficiency. For example, 
suppose the Thai university acquires the addresses for $100. If 
permitted to do so, it will resell them for $500 spend the money 
on something it thinks is more valuable. This amounts to a $400 
wealth transfer to the university, but has no effect on the 
allocation of addresses. If resale is not permitted, on the other 
hand, the university keeps the addresses, but there is a 
deadweight loss: both the university and the potential purchaser 
would be better off if the resale were permitted.

Finally, there may be positive externalities that individuals will 
not take into account when allocating through the market. Each new 
addition to the Internet creates a benefit for everyone who is 
already connected, because they have someone else to share 
information with. This argument is often used to justify subsidy 
of telephone service for high-cost and low-income subscribers, in 
order to generate universal or near-universal service. Unlike the 
wealth distribution argument, this one may justify subsidizing 
addresses for the Thai University: connecting a university from an 
under-represented region may create larger externalities for the 
rest of the Internet community than would connection of another 
commercial organization. A separate fund may be needed to 
subsidize connections from less represented regions, so that we 
can all benefit from worldwide connectivity. This fund might be 
modeled on the one proposed by Eli Noam for funding universal 
telephone service in a competitive environment [8]. Money 
collected from the initial auction of addresses might also be used 
for this purpose.

10. SUMMARY

The essence of this proposal is to make address assignments 
transferable and condone the practice of money changing hands as 
part of such transfers. The best way to make use of an address 
block depends on how valuable it is to attach various devices to 
the Internet, on routing considerations, and on the costs of 
renumbering. By devolving authority to those who are intimately 
acquainted with these costs and benefits, better decisions can be 
made. By introducing money into the mix, parties will have the 
incentives to make those better decisions. This proposal would 
complement a proposal to introduce incentives for route 
aggregation. Rather than fighting the profit motive, the Internet 
community should harness it to give individuals and organizations 
incentives to act in ways that improve resource use.

Taking allocation decisions out of the hands of the administrative 
body will reduce its workload, and avoid many of the headaches 
that would arise if administrative allocation procedures continue 
into an era of scarcity. The registration function would be 
reduced to simply keeping accurate records of the current 
ownership of address blocks.

One new coordinating function will be required, that of market 
maker. This function need not be officially sanctioned, however, 
and several organizations can provide competitive services. An 
important design goal for the market makers is to set up an 
environment in which honest revelation is the best strategy, so 
that all the profitable exchanges can be arranged.

11. REFERENCES

	[1]	E. Gerich, "Guidelines for Management of IP Address Space," 
	Merit RFC 1466, October 1992.

	[2]	Y. Rekhter and T. Li, "Implications of  Various Address 
	Allocation Policies for Internet Routing," Cisco, Internet Draft 
	draft-ietf-cidrd-addr-ownership-07.txt, January 1996.

	[3]	Y. Rekhter, R. G. Moskowitz, D. Karrenberg, and G. J. de 
	Groot, "Address Allocation for Private Internets," IBM, Chrysler, 
	RIPE, RIPE RFC 1597, updated by ID draft-ietf-cidrd-private-addr-
	05.txt, March 1994.

	[4]	S. Bradner and A. Mankin, "The Recommendation for the IP 
	Next Generation Protocol," Harvard, ISI RFC 1752, January 1995.

	[5]	R. Coase, "The Problem of Social Cost," Journal of Law and 
	Economics, vol. 3, pp. 1-44, 1960.

	[6]	R. Myerson and M. Satterthwaite, "Efficient Mechanisms for 
	Bilateral Trade," Journal of Economic Theory, vol. 28, pp. 265-
	281, 1983.

	[7]	G. Huston, "Management of Internet Address Space," AARNet 
	RFC 1744, December 1994.

	[8]	E. Noam, "Beyond liberaltion III: Reforming universal 
	service," Telecommunications Policy, vol. 18, pp. 687-704, 1994.

12. SECURITY CONSIDERATIONS

Security issues are not discussed in this memo.

13. ACKNOWLEDGMENTS

Thanks to Steve Bellovin for pushing me to write up these thoughts,
and for thinking through the impact of CIDR and route aggregation on
the value of address blocks. Thanks to Giuseppe Lopomo, Chris Avery, and
Richard Zeckhauser for information about market mechanisms. Thanks to
Noel Chiappa for comments on an earlier draft, and to Caroline
Richardson and the participants in the CIX Workshop on Internet
Administrative Infrastructure for forcing me to think through the
possible modes of market failure.

14. AUTHOR'S ADDRESS

Paul Resnick
AT&T Research
600 Mountain Ave.
Murray Hill, NJ 07974-0636
Phone: (908) 582-5370
Fax: (908) 582-4113
Email: presnick@research.att.com