Pricing under Constraints in Access Networks: Revenue Maximization and Congestion Management

Abstract

Abstract-This paper investigates pricing of Internet connectivity services in the context of a monopoly ISP selling broadband access to consumers. We first study the optimal combination of flat-rate and usage-based access price components for maximization of ISP revenue, subject to a capacity constraint on the datarate demand. Next, we consider time-varying consumer utilities for broadband data rates that can result in uneven demand for data-rate over time. Practical considerations limit the viability of altering prices over time to smoothen out the demanded datarate. Despite such constraints on pricing, our analysis reveals that the ISP can retain the revenue by setting a low usage fee and dropping packets of consumer demanded data that exceed capacity. Regulatory attention on ISP congestion management discourages such "technical" practices and promotes economics based approaches. We characterize the loss in ISP revenue from an economics based approach. Regulatory requirements further impose limitations on price discrimination across consumers, and we derive the revenue loss to the ISP from such restrictions. We then develop partial recovery of revenue loss through non-linear pricing that does not explicitly discriminate across consumers. While determination of the access price is ultimately based on additional considerations beyond the scope of this paper, the analysis here can serve as a benchmark to structure access price in broadband access networks. I. OVERVIEWThis paper studies the impact of access prices on the congestion management practices and revenue of a monopoly ISP, operating a single bottleneck link with fixed capacity. Although Internet data flows along multiple links on a route between source and destination, the end-user access link is typically the most constrained for capacity, and the major contributor to the connectivity price. Consumer data rate allocation can be determined by socially optimal prices in a competitive market on the one hand, or the revenue maximizing prices in a monopoly ISP market on the other hand. The analysis in this paper explores the latter and represents a benchmark: the most favorable outcome to the ISP and possibly the least favorable outcome to the consumers.The analysis will serve as a basis to understand the pricing of shared access links in wireline and wireless broadband. The analysis has particular significance to pricing wireless broadband as consumers demand high-rate wireline-like applications and content over relatively lower-rate wireless broadband.Access pricing is typically in the form of a flat rate that is independent of usage, or a usage based price, or some combination of the two pricing schemes [1], [2]. We quantify that a significant component of the monopoly ISP revenue is from flat price if consumer price sensitivity is low and through usage price if consumer price sensitivity is high. Flat pricing is generally considered as the preferred choice of consumers [3], but our analysis indicates that flat pricing can lead to a significant loss of co...

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