Optimal Pricing Strategies for Capacity Leasing Based on Time and Volume Usage in Telecommunication Networks

Abstract

In this study, we examined optimal pricing strategies for "pay-per-time," "pay-per-volume," and "pay-per-both-time-and-volume" based leasing of data networks in a monopoly environment. Conventionally, network capacity distribution includes short-/long-term bandwidth and/or usage time leasing. When customers choose connection-time-based pricing, their rational behavior is to fully utilize the bandwidth capacity within a fixed time period, which may cause the network to burst (or overload). Conversely, when customers choose volume-based strategies their rational behavior is to send only the minimum bytes necessary (even for time-fixed tasks for real time applications), causing the quality of the task to decrease, which in turn creates an opportunity cost for the provider. Choosing a pay-per time and volume hybridized pricing scheme allows customers to take advantage of both pricing strategies while lessening the disadvantages of each, because consumers generally have both time- and size-fixed tasks such as batch data transactions. One of the key contributions of this study is to show that pay-per both time and volume pricing is a viable and often preferable alternative to the offerings based on only time or volume, and that judicious use of such a pricing policy is profitable to the network provider. © 2013 Decision Sciences Institute.