Optimal pricing strategies for capacity leasing based on time and volume usage in telecommunication networks

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Official URL: http://dx.doi.org/10.1111/deci.12000

In this study, we use a monopoly pricing model to examine the optimal pricing strategies for “pay-per-time”, “pay-per-volume” and “pay-per both time and volume” based leasing of data networks. Traditionally, network capacity distribution includes short/long term bandwidth and/or usage time leasing. Each consumer has a choice to select volume based, connection-time based or both volume and connection-time based pricing. When customers choose connection-time based pricing, their optimal behavior would be utilizing the bandwidth capacity fully, which can cause network to burst. Also, offering the pay-per-volume scheme to the consumer provides the advantage of leasing the excess capacity to other potential customers serving as network providers. However, volume-based strategies are decreasing the consumers’ interest and usage, because the optimal behaviors of the customers who choose the pay-per-volume pricing scheme generally encourages them to send only enough bytes for time-fixed tasks (for real time applications), causing quality of the task to decrease, which in turn creating an opportunity cost. Choosing pay-per time and volume hybridized pricing scheme allows customers to take advantages of both pricing strategies while decreasing (minimizing) the disadvantages of each, because consumers generally have both time-fixed and size-fixed task such as batch data transactions. However, such a complex pricing policy may confuse and frighten consumers. Therefore, in this study we examined the following two issues: (i) what (if any) are the benefits to the network provider of providing the time and volume hybridized pricing scheme? and (ii) would this offering schema make an impact on the market size? The main contribution of this study is to show that pay-per both time and volume pricing is a viable and often preferable alternative to the only time and/or only volume-based offerings for a large number of customers, and that judicious use of such pricing policy is profitable to the network provider.