Pay-as-You-Go Pricing and Competition in Congested Network Service Markets

As Internet traffic grows exponentially due to the pervasive Internet accesses via mobile devices and increasing adoptions of cloud-based applications, broadband providers start to shift from flat-rate to usage-based pricing, which has gained support from regulators such as the FCC. We consider generic congestion-prone network services, including cloud services, and study the pay-as-you-go type of usage-based pricing of service providers under market competition. Based on a novel model that captures users´ preferences over usage price and congestion alternatives, we derive the induced congestion and market share of the service providers under a market equilibrium and design algorithms to calculate them. By analyzing different market structures, we reveal how users´ value on usage and sensitivity to congestion influence the optimal price, revenue, and competition of service providers, as well as the social welfare. We also obtain the conditions under which monopolistic providers have strong incentives to implement service differentiation via Paris Metro Pricing and whether regulators should encourage such practices.