designed to minimize another type of free riding. For example, backbones that interconnect on a settlement-free basis would prefer coast-to- coast traffic to travel on their peering partners' network to the greatest extent possible. This would mean that they would hand off traffic that they originate at the earliest possible interconnection point and would accept traffic that they terminate at the latest possible interconnection point. In other words, a backbone carrying traffic from New York to Silicon Valley would like to hand it off as early as possible and have the traffic travel across the country on its partner's backbone. Conversely, the same backbone handling traffic heading in the other direction would like the traffic to be handed off as late as possible SO that again the burden of carrying the traffic falls upon its peering partner. In order to avoid this type of free riding, backbones have adopted a practice known as "hot potato routing," in which each backbone delivers packets bound for another backbone at the nearest possible interconnection point. A backbone could defeat the benefits of hot potato routing simply by maintaining a relatively small number of interconnection points located close to its customers. This possibility makes it logical for backbones to limit peering arrangements to those backbones large enough to maintain a presence at each of the major backbone interconnection points (Kende 2000; Milgrom et al. 2000). The Regulation of Broadband Networks and the Internet 3. Coasian Proxies as an Alternative Solution to Congestion Although incorporating transaction cost considerations has yielded important insights into the choice between flat-rate and usage-sensitive pricing, the analy- sis remains incomplete. The problem is that framing the issue as a choice between flat-rate and usage-sensitive pricing fails to take into account the full range of pos- sible institutional forms. In particular, it overlooks the possibility that transaction costs can also be avoided by identifying and chargi