Price of simplicity under congestion

Abstract

In this dissertation, we consider pricing schemes and revenues in the telecommunication industry. Recently, broadband Internet subscribers are increasing exponentially. In 1998, domestic Internet users were 3.1 million and have increased to 30 million in 2003 among which the broadband users were 10 million. Despite the rapid increase in Internet demand, the prevailing pricing scheme, flat-rate pricing, has not been changed, which is inevitably pulling down the providers revenue to its limit. Moreover, under the situation called disparity in Internet usage where a small fraction of users generate most of the traffic, the flat-rate pricing made the users with small usage subsidize the ones with massive consumption. Due to the aforementioned problems, the network providers are recently considering to adopt usage-based pricing. However, this has brought a strong customer resistance and thus, most of the providers are keep using the flat pricing. In light of this, an interesting study related to pricing schemes and revenue in the network was conducted. In 2008 IEEE JSAC, one article argued that the revenue loss from using a simple entry fee in lieu of revenue-maximizing scheme is small. The authors defined this loss as the price of simplicity and showed mathematically that this price is low in a various environment. However, what they have overlooked is congestion, which is one of the crucial element in modeling the network environment. In effect, current Internet is a huge network connected with numerous users. In this context, a users net-utility from using the Internet consists of not only the pure utility of service and the price paid but also the congestion cost where the cost grows as the number of users increases. Thus, in this thesis, we reexamine the price of simplicity under the environment that exists "congestion externality." In particular, we compare revenues obtained using a flat price and two-part tariff and analyze the effect of congestion on the revenue loss when using a simple entry fee in lieu of the two-part tariff. Previous study has shown that when there is no delay disutility the revenue loss is small, which leads to a low "price of simplicity." However, in this study, we show that in an extreme case where all users are identical, the price of simplicity is substantial. Then we consider a more practical scenario where users have different preferences, and show that even in this case, under congestion externality, the price can be extremely high.