Dynamic Bandwidth Pricing: Provision Cost, Market Size,Effective Bandwidths and Price Games

Nowadays, in the markets of broadband access services, traditional contractsare of “static” type. Customers buy the right to use a specific amount of resourcesfor a specific period of time. On the other hand, modern services and applications renderthe demand for bandwidth highly variable and bursty. New types of contracts emerge(“dynamic contracts”) which allow customers to dynamically adjust their bandwidthdemand. In such an environment, we study the case of a price competition situationbetween two providers of static and dynamic contracts. We investigate the resultingreaction curves, search for the existence of an equilibrium point and examine if andhow the market is segmented between the two providers. Our first model considers simple,constant provision costs. We then extend the model to include costs that dependon the multiplexing capabilities that the contracts offer to the providers, taking intoconsideration the size of the market. We base our analysis on the theory of effectivebandwidths and investigate the new conditions that allow the provider of dynamiccontracts to enter the market.