Pricing Communication Networks -- an overview

1. Pricing Communication Networks-- an overview Content from Chapter 1-4 (Part A) of the book: Costas Courcoubetis, Richard Weber, Pricing Communication Networks – Economics, Technology and Modeling. Wiley, 2003

2. Preface • (Traditional) engineers develop communication services without reference to how they should be priced • Advance of technology has created a new and competitive environment for communication service providers • Pricing and Competition issues are worthy of study, because: - pricing affects how service is provided, and how resource is consumed - pricing mechanism provides incentives to control performance and increase stability - pricing mechanism allows more flexible service and efficientresource usage - Competition and regulation issues are important especially for control of bottleneck resource

3. Preface Communication service price “shape” Traffic “Meat” of this book: - generic economic models that allow the network service to be priced (like any other goods) - solution of fairness and resource allocation problems based on pricing - theoretical framework to price contracts (with dynamic and negotiable parameters) - Review of current research topics (incentives, regulation...)

4. Preface • This talk with cover • the general picture (the market, role of price and • economics, etc.) (chapter 1,2) • preliminary modeling: pricing a single link (chapter 1 & 4) • Useful tips... • Quality affects price • Higher price, Lower demand • Rule of market: more competition leads to lower price • Differentiate network service from traditional goods

5. Outline • Communication service - Characteristics - Development of the market - Role of economics • Generic Questions • Tariffs and Contracts • Pricing a single link

6. Communication service- Characteristics • how to evaluate the “value” of the service? network externality: the more to connect, the higher value Metcalfe’s law: n(n-1)/2 Andrew Odlyzko: nlog(n) More sold, more value for network More sold, less value for traditional goods There lies a danger for overdesigning the network

7. Communication service- Characteristics • High construction (fixed) cost, but very low operating (marginal) cost Rule of market: competition drives the price towards marginal cost (danger: the price for communication may approach zero!) Definition Marginal cost (MC) is the change in total cost (TC) when the quantity (Q) produced increases by one unit, i.e. MC=dTC/dQ

8. Communication service- Characteristics • Compare with traditional economic goods - Similarity: decrease price -> more demand increase price -> less demand - Analogy: view a network as a factory that can produce various combinations of network services, subject to technological constraints on the quantities of simultaneously provided services. “A factory whose capacity is limited by the quantity of simultaneously provided products”

9. Communication service- Characteristics 1) Websites (like Yahoo, Sina...) can not charge users for reading the news, because there are hundreds of other websites offering exactly the same information. The market is “commoditized”. • Cheap or pricy? Avoid commodity! 2) MS Word sells at good price because: - it is hard to learn another word processing software - there are many other people using the same software (network externality!) 3) Currently, the long-haul bandwidth (core network) market has been commoditized (due to dot-com bubble).

10. Communication service- Characteristics - No unified expression for quality (peak rate, delay, loss rate, jitter, ...) • Special features - User can buy one service (which is intended for purpose A) for purpose B as long as the quality level is adequate (substitutability) - User can buy one service, and create two services from it (splitting)

11. Communication service- Characteristics - Statistical multiplexing, i.e., certain level of overbooking is allowed. e.g. two users on a link, one with a peak traffic rate of 1Mbps, and a mean rate of 0.5Mbps, another with a peak traffic rate of 1Mbps, and a mean rate of 0.6Mbps, then the capacity can be less than 2Mbps, and higher than 1.1Mbps • Special features Generally, let where x_i is the maximum rate, and \alpha_i \in (0,1) is called “effective bandwidth” Definition Overbooking means admitting more demand than the system can actually support, knowing that most likely they won’t transmit at the maximum rate at the same time. Overbook is also used in transportation and hotels to improve efficiency of resource usage.

12. Communication service- Development of the market • Internet is a “stupid” network - push the complexity to the edge - major reason of its success - benefit local telecom companies, but weaken the companies at the Internet backbone • “Paradox of the best network” - “the best network is the hardest one to make money running” (Isenberg and Weinberger, 2001) - backbone (long-haul) service has been commoditized - however, competition in the backbone is the severest • Dot-com bubble - overestimated and overinvested in the long-haul bandwidth - only about 5% of the optical fibre are lit. • Future - hard to say - will long-haul bandwidth become scarce again?

13. Communication service- the role of economics • Theory from economics provides decentralized control mechanisms - capture the selfish and decentralized behavior of network entities - guarantee the distributed control move towards equilibrium - use resource more efficiently • Network design from a “holistic” view - traditionally only optimize the system performance - now adopt the “economic performance”, including: a) system performance b) flexibility in usage c) ability to adapt and customize the service

14. Outline • Communication service • Generic Questions - Overprovision or Control? - Using price for control and signaling • Tariffs and Contracts • Pricing a single link

15. Generic questions- Overprovision or Control? • To guarantee certain performance level, one can 1) overprovision a capacity that is way larger than demand 2) regulate the demand, i.e., congestion control, admission control, etc. • Advantage of the second approach - no need to accurately predict the demand - it is hard to “overdesign” the whole network - reservation can be costly - provide quality differentiation - too much capacity leads to commodity “There is a 35 minutes wait. However if you’re willing to sit in hell, I will get you a table immediately”.

16. Generic questions- Use price for control and signaling • Price can reduce congestion, and increase stability - when demand increases, the capacity should accordingly expand to guarantee a fixed congestion level - however, this can not be done in “real-time” - during the “transient phase”, price can serve an important role in increasing stability if we charge more with higher congestion level • Incorporate pricing mechanism into TCP? - avoid TCP cheating, provide “incentive-compatibility” • Communication between network operation and the end users - predict traffic from users’ feedback on the tariff provided - a good tariff design should be “incentive-compatible”, i.e., the user has no incentive to cheat about his actual usage plans In sum, the charged price (for a customer) should be a function of her sending rate and the congestion level of the network

17. Outline • Communication service • Generic Questions • Tariffs and Contracts • Pricing a single link

18. Tariffs and Contracts • Tariff is a service plan that defines how the service is going to be charged - it affects the behavior - a good tariff design should encourage “good-minded” behavior An example from taxi fee The price of one trip is calcuated as a+bT+cX (T: time, X: speed), and the time and speed are metered exclusively. If speed is lower than certain value, time counts; if speed is higher than this value, speed counts. How does this tariff affects the drive pattern? Is it incentive-compatible?

19. Tariffs and Contracts A user (who wants to enter the Internet Cafe) pays a fixed price, say $3, and gets an access time T, which depends on the time and number of busy terminals (n). • Another example: dynamic pricing in an Internet Cafe 150 minutes during “off” period (1am-9am) 90 minutes if 0<n<150 60 minutes if 150<n<300 30 minutes if 300<n<450 150 minutes if 0<n<150 120 minutes if 150<n<300 90 minutes if 300<n<450 during “peak” time (11am-3pm) T= during “normal” time (all other time) Effects of this tariff? - lower price for off-peak times helps reduce the peak demand - a feedback system like a thermostat

20. Tariffs and Contracts • Example of contracts Important factors: - statistical or static - who chooses h

21. Outline • Communication service • Generic Questions • Tariffs and Contracts • Pricing a single link

22. Pricing a single link • Preliminary model (chapter 1.4.4) - N customers sharing a single link with total capacity C bits/second - user i is allocated xi bits/second - ui(x) is a concave utility function of user i - there exists a price p* such that the above problem can be solved in a decentralized way, by letting each user i solve the problem: - we can solution xi(p*), expressed as a function of p*

23. Pricing a single link • Preliminary model - we define xi(p) as the demand function of user i - xi(p) strictly decrease with p - we can start at a very low value of p such that ∑xi(p)>C, and then gradually increase p until at some point p*, we have ∑xi(p*)=C. - Now we get the optimal price p*, such that the capacity is fully utilized, and the total value to the society is maximized, meanwhile, each user also wants to cooperate by solving problem P1 !

24. Pricing a single link • Pricing with statistical multiplexing (chapter 4.1-4.4) - Now we consider some overbooking is allowed: user i has a peak sending rate xi, and an effective bandwidth ai, the capacity constraint is now changed to: ∑aixi ≤ C - By Lagrangian method, one can show that the maximum capacity constraint is active if only there exists a scalar λ such that ui’(xi)= λai - Let pi= λai, then the problem can be solved by letting each user solve - Observe that the effective bandwidth is proportional to pi, this illustrates the motivation of using effective bandwidth in pricing. - Question remains: how to find effective bandwidth for different network technologies and applications?