Pricing Strategy of Platform: An Investigation to the Internet Service Provider (ISP) Industry

Transcription

1 Prng trtegy of Pltform: n Investgton to the Internet erve Provder (IP Industry by WDEH KUMR MT, HUI P Correspondng ddress: Dept. of Computng nd Eletron ystems, Unversty of Essex, Wvenhoe Prk, Colhester, Essex, CO4 3Q, UK. Eml: ssksm@essex..uk. Correspondng ddress: Deprtment of Eonoms, Fnne nd ountng, Fulty of usness Envronment & oety, Coventry Unversty, Coventry, CV 5DL. Eml: Hu.Pn@oventry..uk.

2 TRCT We dopt two-sded mrket model to represent the nterton of Internet erve Provders (IP, nternet users, nd ontent provders to study the optml prng strtegy for the IP. We llow the IP to vry ll four omponents of the pre,.e., subsrpton nd usge pre to the nternet user, nd subsrpton nd usge pre to the ontent provder. We offer potentl busness dvntge to the IP desrbng how the totl hrges n be lloted between the nternet user nd the ontent provder nd how the pre hrged to one sde n be lloted between the subsrpton nd usge prts. Under relst ssumpton we show tht proft mxmzng IP would prefer to provde ess subsdy to both the nternet user nd the ontent provder nd derve proft from the usge volume. Keywords: Two-sded mrkets; Internet; IP; Optml Prng

3 . Introduton In the urrent busness model, Internet serve provders (IPs n hrge both nternet users who subsrbe to tht IP nd ontent provders tht re dretly onneted to them. IPs nur fxed ost for provdng ess to the nternet nd n ddtonl ost whh vres ordng to the usge volume (.e. the volume of dt user downlods nd uplods. One of the key ssues the IP mngers urrently fe s how to hrge the nternet users nd ontent provders suh tht totl profts n be mxmzed. In n erly study on nternet prng, Mke-Mson nd Vrn (995 showed tht f usge (vrble ost s hgher thn fxed ost then the usge hrge wll need to over the mjorty of the opertor s expenses. Ths s the se where the network s deployed wth mnmum onfgurton nd pty s expnded ordng to the nresed demnd n usge volume. In relty IPs desgn nd nstll the network bsed on n estmte of the volume of user trff. Ths tends to mke the vrble ost neglgble ompred to the fxed prt whh beomes mjor proporton of the totl ost. IPs worldwde mplement vrnt of flt rte hrgng where the fxed fee s the mjor prt of the totl hrge. ut, s more nd more people downlod TV shows nd moves, prtulrly those n hgh-defnton; nternet networks re fng enormous strn. Therefore some IPs re onsderng hrgng Internet ustomers bsed on how muh dt they onsume. Optml prng n the network ndustry hs ttrted lrge mount of reserh effort, suh s Kelly (997, Key nd Mssoule (999, L nd nnthrm (00 nd Eonomdes nd Tg (007. The reent eonoms reserh on two-sded mrkets (rmstrong 006; Cllud nd Jullen 003; nd Rohet nd Trole 003; et. hs offered stylsed model to nvestgte prng strutures n the network ndustry. In twosded mrkets, there re two types of users, who for onvenene re referred to s the buyer nd seller (Rohet nd Trole 003. They ntert through network/pltform, nd the nterton s subjet to network effets/externltes. etwork externlty s the hnge n the beneft or surplus tht user gets from good/serve when the number of users hnges. The externltes re reted from the trnstons between users nd ther s vdeo serves nd dgtl dstrbuton of ontent over the nternet re growng, brodbnd nternet ess provders T&T, Verzon nd number of ble TV ompnes, hve reently demnded ddtonl ompenston for rryng vluble dgtl serves (Eonomdes nd Tg

4 presene on the pltform whh s defned s trnston nd subsrpton externltes respetvely (Rohet nd Trole 004. lthough mny of the two-sded mrket lterture hs foused on ndvdul ndustres suh s redt rds (Rohet nd Trole 003; hmlensee 00, ntermedres (Cllud nd Jullen 003; ye nd Morgn 00, Yellow Pge dretores (Rysmn 004 nd TV brodstng (nderson nd Cote 003, to our knowledge lttle reserh hs been done to study the prng strteges of IPs wthn two-sded mrket frmework. Therefore, from the busness operton pont of vew prese onlusons on n IP s prng strtegy n only be obtned by developng ndustry spef models. In order to ddress the bove ssue, we dopt two-sded mrket model to represent the nterton of IP, nternet users, nd ontent provders. The IP ts s pltform tht ntermedtes the two sdes: nternet users nd ontent provders. The IP n hrge nternet users nd ontent provders subsrpton fee nd ddtonlly usge fee ordng to the tul trnston volume. However, f we wnt to follow ths prng struture, the two-sded mrket theory so fr provdes lttle gudne s to wht weght the pltform should ple on vrous subsrpton nd usge fees t ts dsposl (Regbeu 005. In ths pper, we llow monopoly IP to vry ll the four omponents of the pre,.e., subsrpton nd usge fee to nternet user, nd subsrpton nd usge fee to the ontent provder. We nvestgte how the totl hrges n be lloted between the nternet user nd the ontent provder, nd how the pre hrged to one sde n be lloted between the subsrpton nd usge prt, so tht optml prng desons n be mde by mngers n order to mxmze proft. y dong so, we gve ler ut lloton between subsrpton fee nd usge fee for both the nternet user nd the ontent provder. Our fndngs show tht the proft mxmsng IP wll prefer to provde subsrpton subsdy by n mount equl to the verge usge beneft t derves from one user. More speflly, the proft mxmsng IP wll prefer to offer negtve subsrpton fee (e.g. sgn-on bonus n the form of free usge for n ntl perod or free desktop/lptop omputer when the subsrpton demnd elstty of the nternet user s less thn one or the ost to provson the ess s neglgble (e.g. n wreless tehnology. When demnd elstty s greter thn one the IP my offer negtve subsrpton fee f the verge usge beneft from user s greter thn the ost of In the se of the nternet, nternet users (buyers ntert wth the ontent provders (sellers through pltform; tht s n Internet erve Provder (IP. 4

5 provsonng ess to tht user. The IP s beneft from usge volume n be postve f the totl usge demnd elstty s greter thn one (.e. demnd s elst. The lloton of usge ost depends on the omprson of usge elstty between nternet users nd ontent provders. The struture of ths pper s the followng. In eton we revew seleted lterture nd provde the motvtons for ths work. eton 3 presents the bs model nd derves the equlbrum prng strteges of the IP. In eton 4 we dsuss the urrent nternet subsrpton nd usge demnd nd ther mpltons to the busness mngers nd poly mkers. eton 5 suggests future reserh nd onludes.. Lterture Revew nd Motvton Our model s relted to Rohet nd Trole (003 nd rmstrong (006. Rohet nd Trole (003 derve n nteror prng result for monopolst two-sded mrket. They show tht under log-onvty of the demnd funton, the optml totl pre s governed by vrnt of the well known monopolst Lerner ondton, nd tht the optml prng struture depends on the reltve mgntude of the ndvdul mrket sdes pre elstty of demnd. In equlbrum, pltforms lower the pre on one sde to nternlze the postve network externlty from the opposte sde. If the network externlty s strong enough, the equlbrum pre hrged to one sde ould be below hs mrgnl ost. rmstrong (006 furthers Rohet nd Trole s (003 nlyss to study the ftors tht determne the pttern of reltve pres offered to the two groups n equlbrum. He shows tht: f sde member exerts lrger postve externlty on eh member of sde, then sde wll be trgeted ggressvely by pltforms sne t s more mportnt to get them on bord; tht wth per-trnston fees ross-group externltes re less ompred to membershp fees, sne frton of the beneft of ntertng wth n extr gent on the other sde s eroded by the extr pyment nurred. Whle the ntutons of rmstrong (006 nd Rohet nd Trole (003 lso ome through our models, t s fundmentlly dfferent n three respets. Frstly, rmstrong s (006 work s more relevnt to tht of shoppng mlls, newsppers nd nghtlubs. In nghtlub, the probblty of meetng desrble women nreses wth the number of women ttendng the lub, therefore the vlue derved from eh nterton wll be hgher. The model presented by Rohet nd Trole (003 s more relevnt to the redt rd mrket. They exmned tht the subsrpton prt of the beneft n be gnored f 5

6 eh rd provdes the sme subsrpton beneft. However these settngs my not be pproprte for other mrkets suh s the IP ndustry. There s ler dstnton between n nternet serve nd other two-sded mrkets suh s nght lubs, mth mkng genes nd redt rds. In the se of the nternet, ontt lwys strts from the user s sde. It mens the volume of trnston wll be determned by the usge of the nternet users, rther thn the ontent provders, gven tht both sdes hve been brought on bord. The seond dstnton s tht nternet users onneted to n IP n trnst wth ll the ontent provders rrespetve of whether they re dretly onneted to hs/her IP or not. In ontrst, mn needs to be member of ll the nght lubs (.e. mult-homed f he wshes to ntert wth ll the women who re members of one but not ll nght lubs. mlrly n redt rd mrket, t s possble tht user my need multple rds to trnst wth ll the merhnts. In ddton, we onsder tht n nternet user s subsrpton deson s solely bsed on the subsrpton fee sne they wll hve no de s to the number of ontent provders onneted to the IP untl they jon. In ontrst, most of lterture n two-sded mrket models the subsrpton demnd s funton of verge pre, whh uses dffultes n usng the trdtonl model for rel world busness nlyss nd deson mkng. In other words, verge pre s deded ordng to verge usge volume whh they onsder s sme for ll users.e. usge s homogeneous; whh my not be the se for the nternet. sed on rel world dt on nternet usge n three dfferent ountres (s shown n Fgure t s found tht 0% of users onsume 90% of totl usge volume. Therefore verge usge pre n gve some de of the subsrpton demnd for the totl mrket, but my fl to provde the omplete pture for heterogeneous user bse tht my hve dfferent subsrpton demnd elstty. 3. The Eonom Model In the se of n nternet serve, n nternet user (buyer derves hs utlty both from the volume of usge nd hs/her blty to ntert wth lrge number of ontent provders (seller. We ssume tht the IP hrges subsrpton fee nd usge fee from user (, whlst t nurs fxed ost C nd usge ost. In ths pper, we model the utlty/beneft of the nter users nd ontent provders n two prts; fxed prt from subsrpton to the IP, nd vrble prt whh s dependent on the tul volume of trnstons. 6

7 3. Internet User nd Content Provder n n The beneft for ndvdul users n eh sde s u } + ( b T, (,. { Where n u s the totl beneft to ndvdul users n eh sde. s the beneft from subsrpton; b s the beneft from eh trnston nd n T s the volume of trnston for n ndvdul user. ssume tht the pltform hrges fxed subsrpton for onneton nd usge fee for eh trnston. The subsrpton demnd funton for nternet users s defned s: = Pr( = ( ( s the number of nternet users nd ndependent on the number of ontent provders. s the beneft nternet user enjoys from subsrpton, whh s exogenously determned. mlrly, the subsrpton demnd of the ontent provder s defned s: = Pr( = ( ( s the number of ontent provders nd ndependent on the number of nternet users. s the ontent provder s beneft from subsrpton, whh s lso exogenously determned. We ssume tht nd re log onve n subsrpton fee. The ntuton behnd ths settng s tht nternet users even though derve beneft from nresed ontent provder prtpton, they wll hve no de of the number of ontent provders untl they jon the IP. In ddton to ths, users my hve no ler de bout ther future volume of usge. Therefore t s resonble to ssume tht number of nternet users nd ontent provders subsrpton. s re solely dependent on the net beneft from the It n be ssumed tht one user subsrbes to n IP, ts usge depends solely on the usge fee (Rohet nd Trole, 006. In rel world stutons the usge volume s dependent on number of ftors suh s the nome of the ndvdul nd the populrty of ontent. However, t s ssumed tht usge volume for n ndvdul user s funton of usge fees nd, nd number of ontent provders. The usge volume dereses wth nresed fees but nreses wth the number of ontent provders whh s represented s; n T,, = n ( b s (3 7

8 In ft, n lrge network, suh s the Internet, wth bllons of potentl onnetons, most re not used t ll. o ssgnng equl usge to ll of users s not justfed. 3 Ths suggests tht the model must onsder the usge heterogenety whh s dependent on trnston volume elstty. The trnston volume elstty s dfferent for dfferent user groups. user n low usge group my hve very hgh elstty ompred to the hgh usge group (ths we show n sub seton 4.. In generl lrge number of users only utlse frton of the resoures nd smll frton of users onsume most of the resoures. Therefore, we ssumed tht the usge demnd for the ndvdul user s dfferent (.e. heterogeneous usge nd ther dstrbuton follows Rylegh densty funton; 4 T ( ( T{ e } f ( T /. Where s funton of nd, nd bsed on ths densty funton we n lulte the totl usge ordng to T T 0 T { e ( T ( } T T =.,, ( Where T T nd (,, re the totl nd the verge monthly usge volumes of the nternet users. 3. The Proft for the IP The IP s llowed to hrge both the nternet user nd the ontent provder, thus hs the possblty to extrt revenue from both sdes. ssume tht the IP hrges subsrpton fee nd usge fee C nd one unt of usge osts. to both sdes, (,. Eh subsrpton nurs fxed ost The prvte monopoly IP hooses pres to mxmze ts totl proft: 3 For detled rguments, refer rsoe et l. ( For gven nd, the number of users wth usge T n follow ny dstrbuton but we hoose the Rylegh densty funton f ( T / T { e T ( ( }. Ths s done bsed on observed usge dstrbuton for 0. mllon DL brodbnd users of L, Indn teleom ompny. smlr dstrbuton s observed for brodbnd nternet users n the UK (Ofom (007 nd Jpn (Cho, et l., 006. The tul dstrbuton of usges for the three ountres s shown n Fgure. 8

9 = C ( + ( C + (. (,,. (4 We llow the IP opertor to vry ll four omponents of the pre ( nd m to predt how the hrges nd ontent provder. Proft mxmzng pres ondtons; 5 nd,, nd nd n be lloted between the nternet user re derved by lultng these four frst-order 0 ; 0 ; 0 ; 0 ; The usge fees nd n be derved by equtng nd to zero.. [ (,,. ( + (,, ] (5 Where (,, { (,, } nd by equtng the rght hnd sde of (5 to zero we get; (,, = - ( (6 (,, Let s the usge demnd elstty of the nternet user whh s defned s; = y substtutng the vlue of (,, / (,, Or (,, (,, ( (,, = (,, n equton (6 we get; ( - (7 mlrly by equtng to zero we get; Where = (,,. ( ( - (8 (,, y replng the vlue of n (7 we get;. y replng the bove vlue of n (8 we get; ( (9 5 Gven the ssumptons of subsrpton demnd funtons, the IP s proft funton n be gurnteed s onve funtons wth respet to ll the pres. Therefore, our frst-order ondtons re suffent to derve the optml pres of the IP. 9

10 ( (0 Equtons (9 nd (0 show lloton of usge fees between the nternet user nd the ontent provder. mlrly from the other two frst order dervtves subsrpton fees t proft mxmzng pres re derved. nd the We n fnd tht; ( ( + { C (. (,, } ( y equtng the rght hnd sde of ( to zero we get; ( ( Where ( = Let = - { C (. (,, } ( (. s the subsrpton demnd elstty of the nternet user whh s defned s; = y substtutng the vlue of / ( ( Or ( = ( n equton ( we get; ( { C - (. (,, } (3 mlrly we n fnd; (,, ( + (.{ C (.. } (4 y equtng the rght hnd sde of (4 to zero we get; ( = - { C + (,, (.. } (5 ( mlr to nternet users we defne subsrpton demnd elstty for the ontent provder s; = / or ( ( = y substtutng the vlue of ( ( n equton (5 we get (,, (.{ C - (.. } (6 0

11 In the equlbrum pres the IP s net beneft from unt usge.e. ( n be lulted s; ( = ( fee y replng the vlue of ( n (3 nd (6 we n fnd the subsrpton for the nternet user nd for the ontent provders s; ( [ C - (. (,, ] (7 (,, (.[ C - (.. ] (8 For gven number of ontent provders, the subsrpton fee for the nternet user s derved from equton (7 n terms of demnd elstty (.e. osts (.e., nd nd the C nd. The seond prt wthn the squre brket of equton (7 ndtes the verge usge beneft of the IP from one nternet user. The beneft s postve when. From equton (7 we n onlude tht the proft mxmsng IP wll prefer to provde subsrpton subsdy to the nternet user (.e. subsrpton fee beneft t derves from one user. s less thn the ost C by n mount equl to the verge usge When the subsrpton demnd elstty of the nternet user s less thn one (.e., the proft mxmsng pres wll prefer to offer negtve subsrpton fee. When demnd elstty s greter thn one the IP my stll offer negtve subsrpton fee f verge usge beneft from n nternet user s greter thn the ost C. Equton (8 shows tht the proft mxmsng opertor my prefer to provde subsrpton subsdy to ontent provders by n mount equl to the usge beneft t derves from the nresed usge of ll nternet users from the ddton of one more ontent provder n the network. In order to dsuss the eonom nd busness mpltons of the equlbrum prng, we need to ssume tht the totl volume elstty nd ndvdul subsrpton elstty nd. ow we n summrze the followng Proposton.

12 Proposton : The equlbrum pres for monopoly IP re; On the nternet user sde: ( { C - (. (,, } ( On the ontent provder sde: ( { C (.. (,, } ( In the equlbrum pres, the IP s net beneft from unt usge.e. ( s equl to (. The beneft s postve only when,.e. the sum of usge demnd elstty s greter thn one. Whle omprng the usge pre for the ontent provder nd the nternet user, the former n be bgger thn the ltter f the elstty of the ontent provder s bgger thn tht of the nternet user other words, the ost wll be mnly lloted to the ontent provder sde.. In The optml subsrpton fee on the ontent provder sde s; ( { Cs - (.. (,, }. If the ontent provder s subsrpton demnd s elst, then n possbly be set hgher thn the onneton ost C. However, when the demnd elstty s very hgh the IP wll prefer to provde ess subsdy by n mount equl to the nresed usge beneft t derves from nternet users for one ddtonl ontent provder jonng the IP. Chekng the optml subsrpton fee for the nternet user sde, ( [ C - (. (,, ], the seond prt wthn the squre brket ndtes the verge usge beneft of the IP from one nternet user. The beneft s postve when. Therefore, we n onlude tht the proft mxmsng IP wll prefer

13 to provde subsrpton subsdy (.e. subsrpton fee mount equl to the verge usge beneft t derves from one user. s less thn the ost C by n More speflly when the subsrpton demnd elstty of the nternet user s less thn one (.e., the proft mxmsng IP mght offer negtve subsrpton fee. However, when demnd elstty s greter thn one the IP n stll offer negtve subsrpton fees when the verge usge beneft s greter thn the ost C. Ths s n lne wth the ntuton tht ontent provders suh s Google, mzon, ey derve hgher vlue from n nresed nternet user bse nd therefore externl beneft to ontent provders my exeed the fxed ost of provsonng n ddtonl nternet user. In tht event the IP n extrt the surplus from the usge volume nd nrese the proft by subsdzng the nternet user. 4. usness nd Poly Impltons Our model llows busness mngers to perform smultons bsed on the ost (to provson the ess nd the usge nd the subsrpton nd the usge demnd elstty (whh we ssume s vlble or n be derved from the dt vlble wth them nd tke desons s to the mount of subsdy to be provded to the nternet user nd ontent provder. 4. ubsrpton Elstty study of Ofom (007 ndtes tht nternet subsrpton s hghly orrelted wth pre. The study shows tht brodbnd nternet subsrpton growth durng the perod of 00 to 006 hs prevled n the UK due to ontnued pre reduton. s n exmple, durng the perod of 00 to 006 the monthly subsrpton pre ws redued from 50 to 0 nd durng the sme perod subsrpton grew from 0.33 to 3 mllons. Ths ndtes tht the subsrpton elstty on pre s very hgh, refleted wth 40 tmes nrese n subsrpton ompred to fve tmes reduton n pre. smlr phenomenon ws observed n the U; durng the perod of 999 to 005 the pre delned sgnfntly from nerly $80 to $5 per month (dk 006 nd the subsrpton nresed by n order of mgntude (from 4.4 to 50. mllons 6. 6 In rel term the pre of brodbnd ess n 005 hd fllen to nerly one-fourth of ts nfltondjusted pre n 999 but subsrpton nresed by n order of ten. 3

14 The dt of both ountres ndtes tht the subsrpton demnd s hghly elst nd mjor prt of the growth n be ttrbuted to the reduton n pre. Kushd nd eung (006 onduted ross-ountry study to nlyse the mpt of pre on brodbnd subsrpton n number of ountres nd showed tht subsrpton s hghly orrelted wth pre. s n exmple, they showed tht even though the deployment of brodbnd nternet strted durng n most ountres, subsrpton growth n Kore nd Jpn surpssed other smlr ountres suh s the U, the UK nd other OECD (Orgnston for Eonom Co-operton nd Development ountres beuse of the sudden reduton of pre durng the perod of 999 to 00. few emprl ppers hve med to mesure demnd elstty n the nternet mrket n reent yers. Rppoport et l. (003 use nested logt model to study the demnd for nternet ess of resdentl ustomers n the U. They found tht the pre elstty for demnd s.46 (elst. Crndll nd Jkson (003 estmte the own-pre elstty of demnd for DL (dgtl subsrber lne serve nd the ross-pre elstty of demnd for ble modem serve wth respet to DL serve n the U. Ther fndngs suggest tht demnd for the DL serve s pre-elst (.84, onfrmng the result of Rppoport et l. (003. Id nd Kurod (006 estmte smlr model for Jpn nludng fbre to the home (FTTH rpdly growng ess tehnology n Jpn n ther hoe set. They onlude tht demnd for FTTH s elst ( Usge Elstty hgher perentge of users wll hve ess to the serve f the opertor provdes subsdsed ess nd mkes proft from the volume of trnstons. However very hgh trnston pre my tully redue the trnston volume whh n turn wll yeld less proft. s n exmple L, the Indn opertor hs mplemented prng sheme where user s hrged ordng to the volume nd speed of ess lne. The fee hrged per unt volume (mllons of bytes of trnston s very hgh nd s result per user verge monthly usge s.5g 7 (ggbytes whh s muh less ompred to 9G n the UK (Ofom, 007nd 30G n Jpn (the pproxmte vlue s extrted from fgures of Cho et l., 006. The opertors n the UK hrge ombnton of fxed fee nd volume dependent fee wheres the opertors n Jpn hrge fxed fees nd vrble fees ordng to the speed of the ess lne. urprsngly the usge dstrbuton (shown 7 The dt s s per L. 4

15 n Fgure for three ountres: Jpn, the UK nd Ind s smlr even though the prng strtegy, eonom, edutonl nd sol ondtons re dfferent. Gven ths usge dstrbuton, n flt rte prng sheme user wth low usge wll be subsdsng to the hgher usge group whh wll rete brrer to ess (.e. subsrpton to pre senstve onsumer (Edell nd Vry 999. sed on rel world nternet usge dt (for the perod of Jnury 007 to Jnury 008 from L (Indn opertor, we fnd tht elstty on usge pre vres for dfferent user groups. L mplemented non-lner prng where dfferent usge fee s hrged for dfferent prng shemes. From the usge volume nd usge fee for dfferent user groups we derved the usge volume elstty whh vres from -6.3 for low usge group to -.6 for hgh usge group. We lso fnd tht usge elstty for mjor proporton of nternet users s greter thn three. Ths hs reently motvted L to mplement n ddtonl prng sheme where (fxed fee s neglgble nd the hrge s olleted ordng to usge volume usness Impltons Our results fltte the IP to presely determne the optml pres from the urrent subsrpton nd usge elstty. If, the IP wll obtn postve proft from eh unt of usge. The more trnston volume, the hgher proft the IP n obtn. If, then the IP wll subsdze the trnston between the nternet users nd ontent provders. Gven, t s stll possble for the IP to ttrt more nternet users by offerng negtve subsrpton fees or free onneton f the subsrpton demnd s nelst (.e.. In tht se the IP s proft wll ome from the subsrpton fee hrged to ontent provders. Rel world dt from L shows tht the usge demnd s elst (.e. ; furthermore, the emprl studes from other sholrs hve shown tht the subsrpton elstty on the nternet user sde s elst (.e.. Tht mens the subsrpton pre should be set to C, djusted downwrd by verge usge beneft nd then multpled by ftor whh depends on the rto (. For hgh 8 Due to ommerl serey we re unble to provde the orgnl dt nformton here. 5

16 subsrpton elstty t s possble tht the subsrpton fee s less thn the fxed ost (.e. subsrpton s subsdsed. In the event when fxed ost C s neglgble (e.g. nternet serve provsonng usng moble tehnology the subsrpton fee n even be negtve. Ths onforms to the offerng of free lptop omputers by the IPs n developed ountres tht provdes nternet ess usng wreless tehnology. 4.4 Poly mplton In flt rte prng users n hve unlmted ess to network both n terms of volume of usge nd speed of trnsmsson n leu of fxed monthly fee (whh my be the sme for ll users. In relty, the problem s the network s under utlzed durng off-pek hours nd no one gets serve durng ongested perods. Ths phenomenon s generlly observed n the se of wreless nternet ess. However, beuse of ts smplty, fltrte prng s stll domnnt hrgng mehnsm n the IP ndustry. ut reently, mny studes, for exmple Edell nd Vry (999 hve hllenged the effeny of flt rte hrgng, sne lrge number of low-usge onsumers end up subsdzng smll number of hgh-usge onsumers. ordng to our results optml prng depends on the subsrpton nd usge elstty. In flt rte prng n IP s proft my be less thn two-prt prng sne fewer onsumers wll subsrbe to the nternet. Odlyzko (000 shows tht n flt rte prng sheme, the volume of usge per subsrber my be hgher but the number of subsrpton n be less. Ths result s supported by the survey from InternetForEveryone (008 tht ndtes penetrton s muh less n the U sne most of the populton nnot fford the flt rte pre. From the sol welfre pont of vew, flt rte prng my rete brrer to ess the nternet for pre senstve onsumer. 5 Conlusons We dopt two-sded mrket model to study the optml prng strtegy for the IP who ts s pltform role tht ntermedtes the two sdes: nternet users nd ontent provders. We show tht the proft mxmsng IP wll prefer to provde subsrpton subsdy (.e. subsrpton fee s less thn the ost of provsonng the onneton to both the nternet user nd ontent provder. More speflly when the subsrpton demnd elstty s less thn one, the proft mxmsng IP mght offer negtve subsrpton 6

17 fee. When subsrpton demnd elstty for the ontent provder s hgh, IPs my offer ess subsdy sne ddtonl ontent provders brng beneft to ll nternet users (e.g. YouTube. When nternet user s demnd elstty s greter thn one the IP n offer negtve subsrpton fees to the nternet users f the verge usge beneft s greter thn the ost of provsonng ess to tht user. Ths s n lne wth the ntuton tht ontent provders suh s Google, mzon nd ey derve hgher vlue from n nresed nternet user bse. In tht event the externl beneft to ontent provders my exeed the fxed ost of provsonng ess to n ddtonl nternet user espelly when the fxed ost of provsonng ess s neglgble (e.g. n wreless ess. Our nlyss nd emprl dt from other sholrs suggest tht mngers n the IP ndustry n derve subsrpton nd usge elstty from the exstng dt nd presely determne the optml pre for both sdes. Our work hs rel busness mpltons for the IP mngers s to how the totl subsdy n be lloted between the nternet user nd ontent provder, nd how the pre hrged to one sde n be lloted between the subsrpton nd the usge prt. In ddton, our pper lso gves nsghts to the publ poly mker to mke welfre nd lloton effeny desons. However, the lmtton of ths pper s we only nvestgte monopoly mrket; therefore the ompetton effet between IPs s not ler. The possble extenson to ths pper s to tke ompetton between IPs nto onsderton by modellng two IPs tve n the sme mrket. In ddton, prng strteges between two IPs wth symmetr osts s n nterestng top. For exmple, the mrgnl onneton ost of wreless IP s muh less thn tht of ble IP, whh ould use the pres of wreless IPs to be more ggressve n the mrket. 7

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