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Congestion-dependent pricing and forward contracts for complementary segments of a communication network

Reiter, Miklós and Steinberg, Richard (2012) Congestion-dependent pricing and forward contracts for complementary segments of a communication network. IEEE/ACM Transactions on Networking, 20 (2). pp. 436-449. ISSN 1063-6692

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Abstract

Congestion-dependent pricing is a form of traffic management that ensures the efficient allocation of bandwidth between users and applications. As the unpredictability of congestion prices creates revenue uncertainty for network providers and cost uncertainty for users, it has been suggested that forward contracts could be used to manage these risks. We develop a novel game-theoretic model of a multiprovider communication network with two complementary segments and investigate whether forward contracts would be adopted by service providers. Service on the upstream segment is provided by a single Internet service provider (ISP) and priced dynamically to maximize profit, while several smaller ISPs sell connectivity on the downstream network segment, with the advance possibility of entering into forward contracts with their users for some of their capacity. We show that the equilibrium forward contracting volumes are necessarily asymmetric, with one downstream provider entering into fewer forward contracts than the other competitors, thus ensuring a high subsequent downstream price level. In practice, network providers will choose the extent of forward contracting strategically based not only on their risk tolerance, but also on the market structure in the interprovider network and their peers' actions.

Item Type: Article
Official URL: http://www.ton.seas.upenn.edu/
Additional Information: © 2012 IEEE
Library of Congress subject classification: H Social Sciences > HF Commerce
Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Sets: Research centres and groups > Management Science Group
Departments > Management
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Funders: Association for Computing Machinery, IEEE Computer Society, IEEE Communications Society
Date Deposited: 22 Jul 2011 09:59
URL: http://eprints.lse.ac.uk/37539/

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