Internet services are traditionally priced at flat rates; however, many Internet service providers (ISPs) have recently shifted towards two-part tariffs where a data cap is imposed to restrain data demand from heavy users. Although the two-part tariff could generally increase the revenue for ISPs and has been supported by the US FCC, the role of data cap and its optimal pricing structures are not well understood. In this article, we study the impact of data cap on the optimal two-part pricing schemes for congestion-prone service markets. We model users' demand and preferences over pricing and congestion alternatives and derive the market share and congestion of service providers under a market equilibrium. Based on the equilibrium model, we characterize the two-part structures of the revenue- and welfare-optimal pricing schemes. Our results reveal that 1) the data cap provides a mechanism for ISPs to transition from the flat-rate to pay-as-you-go type of schemes, 2) both the revenue and welfare objectives of the ISP will drive the optimal pricing towards usage-based schemes with diminishing data caps, and 3) the welfare-optimal tariff comprises lower fees than the revenue-optimal counterpart, suggesting that regulators might want to promote usage-based pricing but regulate the lump-sum and per-unit fees.
From a modeling perspective, Chander @cite_10 , Reitman @cite_16 , Ma @cite_14 and our work all consider the service market with congestion externalities. Chander @cite_10 studied the quality differentiation strategy of a monopoly provider and Reitman @cite_16 studied a multi-provider price competition. Both of them modeled the market as a continuum of non-atomic users, each of which is characterized by a quality-sensitivity parameter. However, this one-dimensional model only applies for flat-rate pricing and the distribution of users was often assumed to be uniform for analytical tractability. To faithfully characterize the utility of users under two-part tiered pricing, we establish a novel two-dimensional model that describes users by their data demand and valuation on data usage. Furthermore, we analyze a class of distributions, including the uniform distribution, to understand the impact of user demand and value on the optimal pricing structures of the providers. Ma @cite_14 also considered a two-dimensional user model; however, the author only focused on the pay-as-you-go pricing, a special case of the two-part tariff structure studied in this paper.
@cite_14 @cite_16 @cite_10
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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. Firms selling a product with congestion externalities to a heterogeneous population of customers have an incentive to offer differentiated levels of quality. In a price competitive market, differentiation arises endogenously through the prices chosen by firms. In equilibrium, firms offer a range of prices, which induce an efficiency improving range of quality levels and allow customers to self-select their preferred price-quality combinations. Additional results suggest that, with many firms in the market, the choice of prices dominates the choice of service capacities in determining congestion levels. Copyright 1991 by Blackwell Publishing Ltd. 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.