Uncertain Demand Internet Access Service: Optimal Decision-Making with Real Options

1. Telecommunications: Introduction of new service • Service: internet access through phone line • Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs, time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers • Decisions: Locations of servers, pricing, number of servers in Phase 1 and Phase 2; • Strategies: • Phase 1 deployment now, look for user response, Phase 2 deployment later; • real options: option to expand, option to abandon Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

2. Decision quality, objectives • Short time to market • Profit • Demand satisfaction • Cost • Total cost for the network and server operations • Network operation patterns and customer behavior patterns which can be learned during phase 1, utilize them for phase 2 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

3. Step 1: Simplest case • Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs, time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers • Decisions: Locations of servers, pricing, number of servers in Phase 1 • Strategies: • phase 1 deployment now, look for user response, phase 2 deployment later; • real options: option to expand, option to abandon Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

4. Step 1: Mathematical model • Building blocks: regions , server locations • Decisions: whether to put server in location - binary variable , amount of service provided by server in location to region • Parameters, data: fixed cost for putting server in location , cost for providing a unit of service from location to region , demand for service from region i , server capacity Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

5. Step 1: Mathematical model • Objectives and structural relations:total costs • Total served demand for region i • Total demand served from server in location j Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

6. Step 1: Mathematical model • Decision model: find decisions and from minimization of total costs subject to satisfaction of demand and to structural constraints Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

7. Step 2: Introducing uncertainty • Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs,time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers • Decisions: Locations of servers, pricing, number of servers in Phase 1 • Strategies: • phase 1 deployment now, look for user response, phase 2 deployment later; • real options: option to expand, option to abandon Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

8. Step 2: Introducing uncertainty • Description of uncertainty • demand: scenarios • Dependence of decisions on available information • Introduction of time. Two decision periods: now and future • Make some decisions now and correct them in the future when more information will be available. • Decision which we make now should allow decision flexibility and adaptation in the future Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

9. Description of demand uncertainty: scenarios • value of demand under scenario r • probability (frequency) of scenario r • Time structure of decisions: • now: placement of servers • futurecorrection: assignment of demand to servers when demand scenario r will be known now future Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

10. Model of two stage decision process • Decision to take now: • find server placement which minimize current placement cost and average future demand service cost where is cost of servicing customers under demand scenario r given server placement y Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

11. Decision to take in the future: Given demand scenario r and server placement y, find the customer assignment which yields the minimal service costs : subject to satisfaction of demand and to structural constraints Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

12. Combining current and future decisions in the same model • Find server placement which minimize current placement cost and average future demand service cost Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

13. Step 3: Enriching decision flexibility: option to expand • Features: geographical regions, demand is uncertain, costs are uncertain, fixed costs, variable costs,time, competition and substitution between services, relations between different market actors, e.g. network providers and service providers • Decisions: Locations of servers, pricing, number of servers in Phase 1 • Strategies: • phase 1 deployment now, look for user response, phase 2 deployment later; • real options: option to expand, option to abandon Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

14. Model of two stage decision process • Decision to take now: • find server placement and demand assignment which minimize current placement cost and average future demand service cost Discount coefficient Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

15. Decision to take in the future: Given demand scenario r and Phase 1 server placement y, find expansion program for Phase 2 and new demand assignment which yield the minimal expansion and service costs : subject to satisfaction of demand and to structural constraints Admissible number of servers at j Universita’ degli Studi di Bergamo Corso di dottorato di ricerca

16. Combined model • Find Phase 1 server placement and current demand assignment which minimize current placement cost and average Phase 2 expansion and demand service cost Universita’ degli Studi di Bergamo Corso di dottorato di ricerca