Middle ground between dropping [1] and buffering is Active Queue Management as wtallis pointed out above. State of the art AQM on Linux nowadays is CoDel [2].
Big network gear vendors that ship to ISPs have adopted early forms of AQM (both RED [3] and proprietary algorithms) quite a while ago - they had to:
(a) backbone routers have much smaller buffer-to-bandwidth ratio (compared to a PC or even home router), so endless buffering is not an option;
(b) buffer tail drops (i.e. what drop keyword does when added to tc filters/disciplines) interact really poorly with TCP bandwidth control algorithms, and rather badly with RTP streams, too (so drop is not an option either - it ruins user's connections; and
(c) ISPs and carriers would typically run links (on average) much closer to saturation than your typical home router, so situation where router has to make buffer/drop decision is much, much more frequent.
[1] My point above was that you don't really want to drop packets on the receiver side, after that packet already traversed expensive part of the network.
