Pricing, competition and content for internet service providers

Peter Key and Richard Steinberg

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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.

Keywords: communication networks; competition; content provider; optimal pricing; Nash equilibrium; profit (search for similar items in EconPapers)
JEL-codes: J01 R14 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2020-10-01
New Economics Papers: this item is included in nep-com, nep-gth, nep-ict, nep-mic and nep-reg
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Published in IEEE/ACM Transactions on Networking, 1, October, 2020, 28(5), pp. 2285 - 2298. ISSN: 1063-6692

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:107008

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