Pricing differentiated Internet services

Abstract

One of the critical challenges facing the networking industry today is to increase the profitability of Internet services. One well-known method in economics for increasing the revenues of a service is to segment its market through differentiation. However, special characteristics of Internet services, such as congestion externality, may complicate the design and provisioning of such offerings. In this paper, we study how a provider should price its services differentially based on their characteristics. By using a game-theoretic approach, we show that even with a simple two-class differentiated service model, if prices are not properly matched with service qualities, then the system may settle into an undesirable equilibrium similar to that in the classical "prisoner's dilemma" game. In addition, there may not even be a stable equilibrium under certain conditions. We then show that dynamic pricing approaches, in which prices are chosen according to users' relative preferences over different service classes, may be used to avoid such types of problems.