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An economic model for pricing tiered network services

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Abstract

We consider networks offering tiered services and corresponding price structures, a model that has become prevalent in practice. We develop an economic model for such networks and make contributions in two important areas. First, we formulate the problem of selecting the service tiers from three perspectives: one that considers the users’ interests only, one that considers only the service provider’s interests, and one that considers both simultaneously, i.e., the interests of society as a whole. We also present an approximate yet accurate and efficient solution approach for tackling these nonlinear programming problems. Given the set of (near-) optimal service tiers, we then employ game-theoretic techniques to find an optimal price for each service tier that strikes a balance between the conflicting objectives of users and service provider. This work provides a theoretical framework for reasoning about and pricing Internet tiered services, as well as a practical toolset for network providers to develop customized menus of service offerings. Our results also indicate that tiering solutions currently adopted by ISPs perform poorly both for the providers and society overall.

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Notes

  1. Note that, with capacity-based pricing, the tier (e.g., access speed) to which a user subscribes does not change over time (except, for instance, when a user upgrades to a higher speed), but with usage-sensitive pricing, a user may be charged according to a different tier every billing period, i.e., depending on the actual traffic volume generated during each period. Nevertheless, this distinction does not affect the economic model we present in the next section.

  2. Note that the leftmost interval is (z 0,z 1], where z 0 = 0 is the “null” service tier we defined earlier. Since F(z 0) = 0, the summation in expression 1 is correctly defined for all service tier intervals.

  3. We have conducted a large number of experiments with a range of distribution, utility, and cost functions. To avoid repetition, in this study, we investigate the MAX-ES problem only with the input functions described next. Nevertheless, these input functions are characteristic of real-life scenarios and the results shown are representative of what we have observed in our experiments.

  4. Many ADSL providers offer download speeds that follow an exponential tiering structure, e.g., 384 kb/s, 768 kb/s, 1.5 Mb/s, 3 Mb/s, etc. Similarly for the 5/10/20/40 GB tiers of monthly traffic used in the recent pilot program by a cable ISP [6].

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Authors and Affiliations

  1. Department of Computer Science, North Carolina State University, Raleigh, NC, 27695-8206, USA

    Qian Lv & George N. Rouskas

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  1. Qian Lv
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  2. George N. Rouskas
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Correspondence to George N. Rouskas.

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This work was supported by the NSF under grant CNS-0434975.

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Lv, Q., Rouskas, G.N. An economic model for pricing tiered network services. Ann. Telecommun. 65, 147–161 (2010). https://doi.org/10.1007/s12243-009-0149-3

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  • DOI: https://doi.org/10.1007/s12243-009-0149-3

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