Paris Metro Pricing for Internet Service Differentiation
This paper analyzes the Paris Metro Pricing (PMP) strategy for differentiating Internet service. PMP has several advantages over other pricing schemes that guarantee quality of service (QoS) such as simplicity and less bandwidth overhead. In this paper, we develop a simple analytical model for PMP. We first assume that there is only one network service provider (a monopolist) serving N users and model the user behavior and the provider’s profit. Then we derive the optimal ratio of dividing a given network capacity in order to maximize the profit of the service provider. Our results show that, by maximizing providers profit, the subscription is also maximized which can be interpreted as a higher satisfaction of users compared to that of not using PMP. In addition, by taking into account various network types, we show that in a monopoly environment, it is always better to implement PMP regardless of user populations we considered. We then further extend our model to a duopoly setting. We found that there exist no Nash equilibrium even when both providers do not differentiate the network service.
KeywordsInternet services price discrimination Paris Metro Pricing revenue maximization user subscription Nash equilibrium
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