Internet Service Tiering as a Market Segmentation Strategy

We consider Internet broadband access as an elastic service whose value varies across segments of the user population. We show that introducing multiple tiers of service can be an effective market segmentation strategy that can lead to an increase of profits for the ISP. We also develop an efficient dynamic programming algorithm for the problem of determining optimally both the service tiers and their prices. Our approach provides new insights into the selection and pricing of Internet tiered services, and our results indicate that exponential tiering structures adopted by ISPs are far from optimal.