Congestion pricing, Bertrand oligopoly, and forward contracts for bandwidth (original) (raw)
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The paper presents a simple game theoretic model of two Internet access providers who choose between peering and transit agreements. There is no regulation with regard to interconnection policies of providers, though there is a general convention that the providers peer if they perceive equal benefits from peering, and have transit arrangements otherwise. In the literature there is a debate whether the large providers gain and exploit market power through the terms of interconnection that they offer to smaller providers. In this paper we develop a game theoretic model to examine how providers decide who they want to peer with and who has to pay transit. The model discusses a set of conditions, which determine the formation of peering and transit agreements. The model takes into account the costs of carrying traffic by peering partners. Those costs should be roughly equal for the providers to have incentives to peer, otherwise the larger provider believes that the smaller provider might free ride on its infrastructure investments. The analysis suggests that the providers do not necessarily exploit market power when refusing to peer. Moreover, Pareto optimum is achieved under transit arrangements only. The paper argues that the market forces determine the decisions of peering and transit, and there is no need for regulation to encourage peering. Furthermore, to increase efficiency, the regulators might actually need to promote transit arrangements.
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IEEE/ACM Transactions on Networking, 2020
We examine competition between two Internet Service Providers (ISPs), where the first ISP provides basic Internet service, while the second ISP provides Internet service plus content, i.e., enhanced service, where the first ISP can partner with a Content Provider to provide the same content as the second ISP. When such a partnering arrangement occurs, the Content Provider pays the first ISP a transfer price for delivering the content. Users have heterogeneous preferences, and each in general faces three options: (1) buy basic Internet service from the first ISP; (2) buy enhanced service from the second ISP; or (3) buy enhanced service jointly from the first ISP and the Content Provider. We derive results on the existence and uniqueness of a Nash equilibrium, and provide closed-form expressions for the prices, user masses, and profits of the two ISPs and the Content Provider. When the first ISP has the ability to choose the transfer price, then when congestion is linear in the load, it is never optimal for the first ISP to set a negative transfer price in the hope of attracting more revenue from additional customers desiring enhanced service. Conversely, when congestion is sufficiently super-linear, the optimal strategy for the first ISP is either to set a negative transfer price (subsidizing the Content Provider) or to set a high transfer price that shuts the Content Provider out of the market.
Congestion Pricing and Noncooperative Games in Communication Networks
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We consider congestion pricing as a mechanism for sharing bandwidth in communication networks, and model the interaction among the users as a game. We propose a decentralized algorithm for the users that is based on the history of the price process, where user response to congestion prices is analogous to “fictitious play” in game theory, and show that this results in convergence to the unique Wardrop equilibrium. We further show that the Wardrop equilibrium coincides with the welfare-maximizing capacity allocation.
A Simple Game Theoretic Analysis of Peering and Transit Contracting among Internet Access Providers
2000
The paper presents a simple game theoretic model of two Internet access providers who choose between peering and transit agreements. There is no regulation with regard to interconnection policies of providers, though there is a general convention that the providers peer if they perceive equal benefits from peering, and have transit arrangements otherwise. In the literature there is a debate
Optimal pricing of a two-sided monopoly platform with a one-sided congestion effect
International Review of Economics, 2010
This paper studies the optimal pricing of a two-sided monopoly platform when one side is affected by congestion. We show that the divide-and-conquer pricing strategy (or skewed pricing) depends not only on the relative magnitude of the sides’ price elasticities of demand but it also depends on the marginal congestion cost that an agent imposes on the others. Compared with the no-congestion case, this pricing strategy gives rise to some interesting features that violate the results of Rochet and Tirole (J Eur Econ Assoc 1:990–1029 in 2003, Rand J Econ 37:645–667 in 2006). In the case of equal price elasticities of demand, the no-congested side is charged the highest price. On the other hand, in the case of different price elasticities, the platform congestion pricing depends on a certain threshold of the marginal congestion cost. We show, under some conditions, that the divide-and-conquer pricing strategy is reversed. In the social context, the Rochet and Tirole’s (J Eur Econ Assoc 1:990–1029 in 2003) cost allocation condition is modified by the congestion cost. We show that the congestion does not only affect the buyers’ contribution to the sellers’ surplus, but it also affects the sellers’ contribution to the buyers’.
On-net and off-net pricing on asymmetric telecommunications networks
Information Economics and Policy, 2007
The differential between on-net and off-net prices, for example on mobile telephony networks, is hotly debated between telecoms operators and regulators. Small operators contend that their competitors' high off-net prices are anticompetitive. We show that if the utility of receiving calls is taken into account, the equilibrium pricing structures will indeed depend on firms' market shares. Larger firms will charge higher off-net prices, even without anticompetitive intent, and both under linear and two-part tariffs. We also show that nevertheless high on-net / off-net differentials can be used for anticompetitive purposes.
Internet pricing with a game theoretical approach: concepts and examples
IEEE/ACM Transactions on Networking, 2002
The basic concepts of three branches of game theory, leader-follower, cooperative, and two-person nonzero sum games, are reviewed and applied to the study of the Internet pricing issue. In particular, we emphasize that the cooperative game (also called the bargaining problem) provides an overall picture for the issue. With a simple model for Internet quality of service (QoS), we demonstrate that the leader-follower game may lead to a solution that is not Pareto optimal and in some cases may be "unfair," and that the cooperative game may provide a better solution for both the Internet service provider (ISP) and the user. The practical implication of the results is that government regulation or arbitration may be helpful. The QoS model is also applied to study the competition between two ISPs, and we find a Nash equilibrium point from which the two ISPs would not move out without cooperation. The proposed approaches can be applied to other Internet pricing problems such as the Paris Metro pricing scheme.
2006
We consider congestion pricing as a mechanism for sharing bandwidth in communication networks, and model the interaction among the users as a game. We propose a decentralized algorithm for the users that is based on the history of the price process, where user response to congestion prices is analogous to “fictitious play” in game theory, and show that this results in convergence to the unique Wardrop equilibrium. We further show that the Wardrop equilibrium coincides with the welfare maximizing capacity allo-
Optimal Pricing of a Duopoly Platform with Two-Sided Congestion Effect
Journal of Research in Industrial Organization, 2011
We study, in this paper, the impact of two-sided congestion effect on the pricing policy of a twosided duopoly platform. Relative to Armstrong (2006), we show that, with congestion effect, (i) competition for submarket share is softened, (ii) the divide-and-conquer pricing strategy is modified insofar as it depends upon the differential of the marginal congestion costs and (iii) each platform charges any agent of one side a price that covers not only the marginal congestion cost that he imposes on agents of his own side having joined its platform, as the traditional principle of the textbook congestion pricing, but also it covers the marginal congestion cost that he indirectly imposes on the of-his-type agents having chosen to join the rival platform. This issue matters despite there is no technical link between the two platforms.