Internet Service Classes under Competition.pdf

Internet Service Classes under Competition Richard Gibbens, Robin Mason, Richard Steinberg Abstract— This paper analyses competition between two Internet Service Providers (ISPs) either or both of which may choose to offer multiple service classes. In the model analysed, a social planner who maximises the total benefit from network usage and a profit maximising monopolist will both form multiple service classes; but two networks com- peting to maximise profits will not. The reason is that a competition effect always outweighs a segmentation effect. Networks wish to offer multiple service classes in order to increase user benefits and hence charge higher prices. In doing so, however, effectively they increase the number of points in the service quality range at which they compete. Consequently, in any equilibrium competitive outcome, both ISPs offer a single service class. The analysis has particular implications for the Paris Metro pricing (PMP) proposal of [17])—which is considered in depth in this paper—since it suggests that PMP may not be viable under competition. Keywords— Congestion, Differentiated services, Internet charging, Multiproduct competition, Paris Metro pricing, Quality of Service I. Introduction and Motivation IT is widely recognised that Internet usage is subject to a‘tragedy of the commons’ ([10]) and that pricing of Inter- net resources is required to control congestion. Many pro- posals have been considered in the literature. The reader is referred, in particular, to the papers of [4], [9], [12] and [15]. One approach suggested by several authors is that a small number of service classes should be offered on the In- ternet. For example, Gupta, Stahl and Whinston advocate a finite number of (perhaps four or less) priority classes. In Odlyzko’s ‘Paris Metro Pricing’ (PMP) proposal ([17]), between two and four service classes would be generated by differential pricing on logically separate channels. (See below for more on this scheme.) This paper