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Pricing Communication Services with Delay Guarantee

School of Business, University of Connecticut, One University Place, Stamford, Connecticut 06901–2315, USA
University of Washington Business School, Box 353200, Seattle, Washington 98195–3200, USA
University of Washington Business School, Box 353200, Seattle, Washington 98195–3200, USA
john.zhang{at}business.uconn.edu
ddey{at}u.washington.edu
ytan{at}u.washington.edu

Although pricing communication services has received attention, there has been little work where quality-of-service (QoS) guarantees are incorporated into ex ante pricing of communication links. In recent years, however, data networks providing services with QoS guarantees have become quite popular. We study optimal pricing for communication links provided over packet-switching networks with explicit QoS guarantees in terms of an expected per-packet delay. We first develop a pricing scheme for multiple classes of service when the delay guarantees are fixed and exogenously determined and analyze this scheme with one and two classes. Subsequently, we extend this analysis to the case where a provider can choose her own QoS parameters. We also examine long-run pricing and capacity planning for one and two classes of service. Finally, we consider other QoS guarantees such as jitter, packet-loss ratio and maximum delay.

Key words: data network pricing; quality of service; queueing effects; network externality
History: received August 2003; revised April 2005; accepted July 2005.