Internet Service Pricing: Flat or Volume?

• Published in: Journal of network and systems management Vol. 21; no. 2; pp. 298 - 325
• Main Authors: Mo, Jeonghoon, Kim, Weonseek, Park, Hosung
• Format: Journal Article
• Language: English
• Published: Boston Springer US 01.06.2013; Springer; Springer Nature B.V
• Subjects: Applied sciences; Communication; Communications Engineering; Competition; Computer Communication Networks; Computer Science; Computer science; control theory; systems; Computer systems and distributed systems. User interface; Computer Systems Organization and Communication Networks; Consumers; Duopoly; Economics; Elasticity; Elasticity of demand; Equilibrium; Error analysis; Exact sciences and technology; Game theory; Games; General aspects; Information Systems and Communication Service; Internet; Internet access; Internet service providers; Market segmentation; Market strategy; Mathematical analysis; Monopolies; Networks; Operations Research/Decision Theory; Preferences; Pricing; Pricing policies; Revenues; Software; Statistical analysis; Systems management; Tariffs; Utility functions; Willingness to pay; Utility; Volume-based pricing; Pricing of Internet services; Two-part tariff; Flat pricing; Estimation error; Market structure; Wellfare economy; Normal form; Income; Web service; Elasticity; Modeling; Surplus; Monopole; Pricing; Tariffication; Service Proposal; Oligopoly
• ISSN: 1064-7570; 1573-7705
• DOI: 10.1007/s10922-012-9234-4

In this paper, we study the pricing of Internet services under monopoly and duopoly environments using an analytic model in which a service provider and users try to maximize their respective payoffs. We compare a few popular pricing schemes, including flat, volume-based, two-part, and nonlinear tariffs, with respect to revenue, social welfare, and user surplus. We perform a study of the sensitivity of these schemes to the estimation errors. In the duopoly situation, we formulate a simple normal form game between two service providers and study their equilibrium behaviors. Our main findings include: (1) the flat pricing generates higher revenue than the pure volume pricing when the elasticity of demand is low; (2) the volume-based pricing is better for society and users than the flat pricing regardless of the elasticity; (3) the market is segmented into two when one provider provides flat pricing and another provides volume based pricing.