Usage-based Pricing Research Articles

The licensing battlefield: consortia as new middlemen between publishers, agents and libraries – a view from the Continent

Based on a presentation given at the 2007 ASA Conference: ‘Policy, Pricing and Purchasing’ Consortia are everywhere nowadays. Every country and every region is now covered by at least one consortium. International co-operation is taking off as well, both formally and informally. Nevertheless there is a wide variation in the nature and size of consortia. One of the most distinguishing features is the role that national governments are assigning to themselves. Consortia are vulnerable to conflicts of interests that are more likely to occur when a government’s role is weak.The article deals with pricing issues that haunt the minds of librarians.The mixed feelings of librarians about usage-based pricing schemes are explained. An alternative business model is outlined that allows for differentiation and transparency in the pricing of digital products and that restores flexibility in purchasing decisions for libraries.

Defeating DDoS attacks by fixing the incentive chain

Cooperative technological solutions for Distributed Denial-of-Service (DDoS) attacks are already available, yet organizations in the best position to implement them lack incentive to do so, and the victims of DDoS attacks cannot find effective methods to motivate them. In this article we discuss two components of the technological solutions to DDoS attacks: cooperative filtering and cooperative traffic smoothing by caching. We then analyze the broken incentive chain in each of these technological solutions. As a remedy, we propose usage-based pricing and Capacity Provision Networks, which enable victims to disseminate enough incentive along attack paths to stimulate cooperation against DDoS attacks.

Pricing web services

This paper focuses on the challenges associated with composing and pricing web services. We present the results of an online experiment, where subjects were confronted with a variety of choices and decisions relating to web service markets and service composition. Our analysis shows that people expect the price of a composite web service to be lower than the sum of the prices of the elementary services, that is, users are not willing to pay for aggregation by a third party. To obtain a viable business model for composite web services, non-standard pricing mechanisms, such as auctions and negotiations, possibly supported by electronic agents, have to be taken into consideration. Usage-based pricing schemes, combined with an option to switch to a flat subscription, seem most appropriate to penetrate the developing market for web services.

Charging the Internet Without Bandwidth Reservation: An Overview and Bibliography of Mathematical Approaches

Pricing is one of the biggest challenges facing the next generation of the Internet. Even if flat rate pricing is one of the main reasons for the success of the Internet, the only way to prevent network congestion and to differentiate services is to adopt usage-based pricing schemes. We review in this paper, from a mathematical modeling point of view, the pricing schemes without resource reservation that have been developed in the literature. Indeed, an advantage of the absence of reservation in the Internet is that network management is cheap. Even if accounting and billing will increase this cost, we believe that pricing without resource reservation is the lesser of two evils when costly bandwidth reservation procedures are applied.

Dynamics of usage-priced communication networks: the case of a single bottleneck resource

In this paper, we study end-user dynamics of communication networks employing usage-based pricing. We propose a generic network access mechanism in which users modify their access control parameter based on the quality of service they receive in order to maximize their net benefit. For the examples of users sharing access to a bandwidth resource via a single trunk with Erlang loss dynamics and for a differentiated services (diffserv) network, we study the equilibrium/fixed points and give analytical results on convergence assuming the network prices are fixed.

Adaptive provisioning of differentiated services networks based on reinforcement learning

The issue of bandwidth provisioning for Per Hop Behavior (PHB) aggregates in Differentiated Services (DiffServ) networks has received a lot of attention from researchers. However, most proposed methods need to determine the amount of bandwidth to provision at the time of connection admission. This assumes that traffic in admitted flows always conforms to predefined specifications, which would need some form of traffic shaping or admission control before reaching the ingress of the domain. This paper proposes an adaptive provisioning mechanism based on reinforcement-learning principles, which determines at regular intervals the amount of bandwidth to provision to each PHB aggregate. The mechanism adjusts to maximize the amount of revenue earned from a usage-based pricing model. The novel use of a continuous-space, gradient-based learning algorithm, enables the mechanism to require neither accurate traffic specifications nor rigid admission control. Using ns-2 simulations, we demonstrate using Weighted Fair Queuing, how our mechanism can be implemented in a DiffServ network.

Nonlinear Pricing of Information Goods

This paper analyzes optimal pricing for information goods under incomplete information, when both unlimited-usage (fixed-fee) pricing and usage-based pricing are feasible and administering usage-based pricing may involve transaction costs. It is shown that offering fixed-fee pricing in addition to a nonlinear usage-based pricing scheme is always profit improving in the presence of nonzero transaction costs, and there may be markets in which a pure fixed-fee is optimal. This implies that the optimal pricing strategy for information goods is almost never fully revealing. Moreover, it is proved that the optimal usage-based pricing schedule is independent of the value of the fixed fee, a result that simplifies the simultaneous design of pricing schedules considerably and provides a simple procedure for determining the optimal combination of fixed-fee and nonlinear usage-based pricing. The introduction of fixed-fee pricing is shown to increase both consumer surplus and total surplus. The differential effects of setup costs, fixed transaction costs, and variable transaction costs on pricing policy are described. These results suggest a number of managerial guidelines for designing pricing schedules. For instance, in nascent information markets, firms may profit from low fixed-fee penetration pricing, but as these markets mature, the optimal pricing mix should expand to include a wider range of usage-based pricing options. Minimum fees, quantity discounts, and adoption levels across the different pricing schemes are characterized, strategic pricing responses to changes in market characteristics are described, and the implications of the paper's results for bundling and vertical differentiation of information goods are discussed.

Nonlinear Pricing of Information Goods

This paper analyzes optimal pricing for information goods under incomplete information, when both unlimited-usage (fixed-fee) pricing and usage-based pricing are feasible, and administering usage-based pricing may involve transaction costs. It is shown that offering fixed-fee pricing in addition to a non-linear usage-based pricing scheme is always profit-improving in thepresence of any non-zero transaction costs, and there may be markets in which a pure fixed-fee is optimal. This implies that the optimal pricing strategy for information goods is almost never fully revealing. Moreover, it is proved that the optimal usage-based pricing schedule is independentof the value of the fixed-fee, a result that simplifies the simultaneous design of pricing schedules considerably, and provides a simple procedure for determining the optimal combination of fixed-fee and non-linear usage-based pricing. The introduction of fixed-fee pricing is shown to increase bothconsumer surplus and total surplus. The differential effects of setup costs, fixed transaction costs and variable transaction costs on pricing policy are described. These results suggests a number of managerial guidelines for designing pricing schedules. For instance, in nascent information markets,firms may profit from low fixed-fee penetration pricing, but as these markets mature, the optimal pricing mix should expand to include a wider range of usage-based pricing options. The extent of minimum fees, quantity discounts and adoption levels across the different pricing schemes are characterized, strategic pricing responses to changes in market characteristics are described, and the implications of the paper s results for bundling and vertical differentiation of information goodsare discussed.

Business Planning for Network Services: A Systems Thinking Approach

As demand for online network services continues to grow, service providers are looking to meet this need and avail themselves of business opportunities. However, despite strong growth in demand, providers continue to have difficulty achieving profitability, customer churn remains high, and network performance continues to draw complaints. We suggest that strategic business planning for network services would benefit from a systems thinking approach that analyzes the feedback effects present in the underlying business process. These feedback loops can be complex and have significant impact on business performance. For instance, while the size of a provider's customer base depends on price and network performance, network performance is itself dependent on the size of the customer base. In this paper, we develop a planning model that represents these feedback effects using the finite difference equations methodology of systems dynamics. The model is validated by showing its fit with essential characteristics of the underlying problem domain, and by showing its ability to replicate observed reference mode behaviors. Simulations are then carried out under a variety of scenarios to examine issues important to service providers. Among other findings, the simulations suggest that (a) under flat-rate pricing, lowering price to increase customer base can hurt profitability as well as network performance; (b) under usage-based pricing, lowering price need not necessarily lead to a larger customer base; and (c) in addition to price, the customers' threshold of tolerance for performance degradation plays a significant role in balancing market share with profitability. We briefly present a prototype decision support system based on the systems thinking approach, and suggest ways in which it could be used to help business planning for network services.

How to charge for network services – flat-rate or usage-based?

Currently, the Internet service provider market offers two different types of pricing plans. In the USA, the predominant pricing plan is a flat-rate plan. In Europe and Asia, the predominant one is a per-minute pricing plan. Enrolled in such a pricing plan, users have to pay for the connect time to the Internet. Although Internet Service Providers (ISPs) have competed heavily for users in these last few years, they only have focused on trying to offer the lowest price within such pricing plans. A potentially more profitable and sustainable method of doing business would be for ISPs to differentiate themselves by offering more customized pricing plans for certain user groups. An important question then is whether a pricing plan exists that is attractive to users, but also allows ISPs to build a sustainable business. Based on empirical results of the INternet Demand EXperiment (INDEX) project, we discuss a pricing plan for Internet access that appears to be appreciated by Internet users as well as by ISPs. This pricing plan combines the advantages of flat-rate pricing and usage-based pricing. Users will benefit by receiving unlimited access to a basic service with the choice of higher quality of service (QoS) whenever they demand. From the ISPs' perspective, such a pricing plan will help any ISP to focus on certain user groups and to reduce peak network load.

Benefits and Costs of Adopting Usage-Based Pricing in a Subnetwork

There has been a sustained argument in Internet community regarding the utility, feasibility, and sustainability of the usage-based Internet traffic pricing versus the attractiveness of non-usage-based pricing from consumer perspective. Using a simulated network of well defined services we investigate the benefits: (i) received by the system as a whole, and (ii) received by individuals and groups of customers, when part of the network has no-usage based pricing whereas the other part employs an economic usage based pricing. Our simulation results indicate that not only are the systemwide benefits enhanced by usage-based pricing, but also the users who lose out are precisely the people who should be denied access during the peak periods.

Pricing in computer networks

As the Internet makes the transition from research testbed to commercial enterprise, the topic of pricing in computer networks has suddenly attracted great attention. Much of the discussion in the network design community and the popular press centers on the usage-based vs. flat pricing debate. The more academic literature has largely focused on devising optimal pricing policies; achieving optimal welfare requires charging marginal congestion costs for usage. In this paper we critique this optimality paradigm on three grounds: (1) marginal cost prices may not produce sufficient revenue to fully recover costs and so are perhaps of limited relevance, (2) congestion costs are inherently inaccessible to the network and so cannot reliably form the basis for pricing, and (3) there are other, more structural, goals besides optimality, and some of these goals are incompatible with the global uniformity required for optimal pricing schemes. For these reasons, we contend that the research agenda on pricing in computer network should shift away from the optimality paradigm and focus more on structural and architectural issues. Such issues include allowing local control of pricing policies, fostering interconnection, handling multicast appropriately, and allowing receivers to pay for transmission. To illustrate our point, we describe how these goals might be accomplished in the context of a different pricing paradigm: edge pricing. In addition, we argue that in the context of this edge pricing paradigm, usage-based pricing and flat pricing are not radically different but instead both reside along the single continuum of usage-constraining pricing policies.

The political economy of congestion charges and settlements in packet networks

Abstract This paper examines the case for usage-based pricing in the Internet by extending earlier work on congestion pricing in a single network to the case of multiple, competing carriers. A settlements problem arises in this context because of the need to allocate revenues among the carriers. The settlements and pricing problems are closely related. After deriving the optimal congestion prices, we discuss alternative settlements mechanisms and identify a number of the technical and strategic issues that require further research before practical implementation of usage pricing in a multiple domain network is feasible.

Some FAQs about usage-based pricing

This is a list of Frequently Asked Questions about usage-based pricing of the Internet. We argue that usage-based pricing is likely to come sooner or later and that some serious thought should be devoted to devising a sensible system of usage-based pricing.

Web traffic characterization: an assessment of the impact of caching documents from NCSA's web server

We analyze two days of queries to the popular NCSA Mosaic server to assess the geographic distribution of transaction requests. The wide geographic diversity of query sources and popularity of a relatively small portion of the web server file set present a strong case for deployment of geographically distributed caching mechanisms to improve server and network efficiency. The NCSA web server consists of four servers in a cluster. We show time series of bandwidth and transaction demands for the server cluster and break these demands down into components according to geographical source of the query. We analyze the impact of caching the results of queries within the geographic zone from which the request was sourced, in terms of reduction of transactions with and bandwidth volume from the main server. We find that a cache document timeout even as low as 1024 seconds (about 17 minutes) during the two days that we analyzed would have saved between 40% and 70% of the bytes transferred from the central server. We investigate a range of timeouts for flushing documents from the cache, outlining the tradeoff between bandwidth savings and memory/cache management costs. We discuss the implications of this tradeoff in the face of possible future usage-based pricing of backbone services that may connect several cache sites. We also discuss other issues that caching inevitably poses, such as how to redirect queries initially destined for a central server to a preferred cache site. The preference of a cache site may be a function of not only geographic proximity, but also current load on nearby servers or network links. Such refinements in the web architecture will be essential to the stability of the network as the web continues to grow, and operational geographic analysis of queries to archive and library servers will be fundamental to its effective evolution.

Some FAQs about Usage-Based Pricing

This is a list of Frequently Asked Questions about usage-based pricing of the Internet. We argue that usage-based pricing is likely to come sooner or later and that some serious thought should be devoted to devising a sensible system of usage-based pricing. This document is available on-line at http://gopher.econ.lsa.umich.edu.