Differentiated Internet pricing using a hierarchical network game model

Abstract

This paper builds on the model and results of T. Basar and R. Srikant, (2002) and extends them to the case of differentiated prices, again for the single link case. It introduces a hierarchical network game with one service provider and multiple users of different types, where the service provider is allowed to charge different prices to users of different types. The service provider plays with the users a Stackelberg (leader-follower) game, while among users themselves, they play a Nash game. The paper establishes for a general network with multiple links the existence of a unique Nash equilibrium along with the existence of a unique Stackelberg solution. The economics of providing large capacity and price differentiation is examined especially in the single link case and for a many-user regime. One important result is that optimum price differentiation leads to a more egalitarian distribution of resources at fairer prices and improves the service provider's revenue and network performance. Moreover, the service provider has an incentive to increase the capacity proportionally with the number of additional users admitted.