Traditionally, Internet Access Providers (APs) only charge end-users for Internet access services; however, to recoup infrastructure costs and increase revenues, some APs have recently adopted two-sided pricing schemes under which both end-users and content providers are charged. Meanwhile, with the rapid growth of traffic, network congestion could seriously degrade user experiences and influence providers' utility. To optimize profit and social welfare, APs and regulators need to design appropriate pricing strategies and regulatory policies that take the effects of network congestion into consideration. In this paper, we model two-sided networks under which users' traffic demands are influenced by exogenous pricing and endogenous congestion parameters and derive the system congestion under an equilibrium. We characterize the structures and sensitivities of profit- and welfare-optimal two-sided pricing schemes and reveal that 1) the elasticity of system throughput plays a crucial role in determining the structures of optimal pricing, 2) the changes of optimal pricing under varying AP's capacity and users' congestion sensitivity are largely driven by the type of data traffic, e.g., text or video, and 3) APs and regulators will be incentivized to shift from one-sided to two-sided pricing when APs' capacities and user demand for video traffic grow. Our results can help APs design optimal two-sided pricing and guide regulators to legislate desirable policies.
From the perspective of modeling and analysis, our model extends Rochet and Tirole @cite_14 , in which the two-sided network platforms do not incur congestion. To capture the endogenous network congestion and its effect in Internet markets, we introduce a system congestion under a market equilibrium and use a gain function to model the decline degrees of network throughput under different congestion levels. Besides, we also analyze the sensitivities of two-sided pricing under the varying network environments, which are instructive and meaningful for APs and regulators to adjust pricing schemes and regulatory policies with the evolution of the Internet. Ma @cite_10 and Chander and Leruth @cite_7 also consider the service markets with congestion externalities. Ma @cite_10 analyzed the pay-as-you-go pricing and competition among multiple ISPs. Chander and Leruth @cite_7 studied the quality differentiation strategy of a monopoly provider. Both of them focused on the one-sided markets while we consider the more general two-sided markets.
@cite_14 @cite_10 @cite_7
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Many if not most markets with network externalities are two-sided. To succeed, platforms in industries such as software, portals and media, payment systems and the Internet, must "get both sides of the market on board ". Accordingly, platforms devote much attention to their business model, that is to how they court each side while making money overall. The paper builds a model of platform competition with two-sided markets. It unveils the determinants of price allocation and enduser surplus for different governance structures (profit-maximizing platforms and not-for-profit joint undertakings), and compares the outcomes with those under an integrated monopolist and a Ramsey planner. As Internet traffic grows exponentially due to the pervasive Internet accesses via mobile devices and increasing adoptions of cloud-based applications, broadband providers start to shift from flat-rate to usage-based pricing, which has gained support from regulators such as the FCC. We consider generic congestion-prone network services, including cloud services, and study the pay-as-you-go type of usage-based pricing of service providers under market competition. Based on a novel model that captures users' preferences over usage price and congestion alternatives, we derive the induced congestion and market share of the service providers under a market equilibrium and design algorithms to calculate them. By analyzing different market structures, we reveal how users' value on usage and sensitivity to congestion influence the optimal price, revenue, and competition of service providers, as well as the social welfare. We also obtain the conditions under which monopolistic providers have strong incentives to implement service differentiation via Paris Metro Pricing and whether regulators should encourage such practices. The paper develops a model of product differentiation in which the quality of a product may be negatively affected by the number of consumers buying it, as it is the case for any good affected by congestion. It is shown that for any positive degree of heterogeneity among the consumers, a monopolist will always find it more profitable to differentiate, i.e., to sell more than one quality of the product at different prices.