In this dissertation, we focus on the design of tiered pricing plans offered by Internet Service Providers (ISPs). We also analyze the impact of data caps on the pricing plans, users, ISP profits and social welfare, by considering ISP monopoly and ISP duopoly, respectively.
The initial work is about modeling ISP service tier design without data caps. Web browsing and video streaming are considered as the two dominant Internet applications. We propose a novel set of utility functions that depend on a user's willingness to pay for each application, the performance of each application, and the time devoted to each application. For a monopoly provider, the demand function for each tier is derived as a function of tier price and performance. We first give conditions for the tier rates, tier prices, and network capacity that maximize Internet Service Provider profit, defined as subscription revenue minus capacity cost. We then show how an Internet Service Provider may simplify tier and capacity design, by allowing their engineering department to set network capacity, their marketing department to set tier prices, and both to jointly set tier rates.
The next work is focused on how ISPs choose data caps and the resulting impact on users. We propose a data cap model by extending the ISP tier design model. A monopoly ISP is presumed to maximize its profit by controlling tier prices, tier rates, data caps and overage charges. We show how users fall into five categories: non-Internet subscribers, basic tier subscribers, premium tier subscribers unaffected by a data cap, premium tier subscribers who are capped but do not choose to exceed the cap, and premium tier subscribers who exceed the cap and pay overage charges. When data caps are used for profit maximization, we find that the monopoly ISP has the incentive to keep the basic tier price and basic tier rate unchanged, to increase the premium tier rate, and to reduce the premium tier price. The ISP also has the incentive to set smaller caps and higher overage charges than when caps are used only to ensure that heavy users pay for their usage.
Finally, we analyze the impact of data caps on ISP duopoly competition. In the duopoly competition model, users seek to maximize their surplus by making their ISP subscription choices and by controlling the time devoted to Internet activities. ISPs seek to maximize their profits by competing through their tier prices, tier rates, network capacities, data caps and overage charges. We illustrate how users' utilities are affected by data caps, and the resulting impact upon ISP market shares. We show that both ISPs have an incentive to use data caps and overage charges to ensure that heavy users pay at least an amount equal to the cost of their usage. The initial incentives for both ISPs to update their tier prices and tier rates given the newly added data caps are also predicted under different scenarios. The final Nash equilibrium with data caps for profit maximization is analyzed through simulation, and compared to the Nash equilibrium without data caps. The corresponding changes in ISP profits, user subscription choices, and user surpluses are illustrated.