The Role of Data Cap in Optimal Two-part Network Pricing

TL;DR

This paper analyzes how data caps influence the design of optimal two-part pricing schemes for congestion-prone internet services, revealing their role in transitioning from flat-rate to usage-based pricing and implications for regulation.

Contribution

It models user demand and market equilibrium to characterize revenue- and welfare-optimal two-part tariffs with data caps, providing insights into pricing strategies and regulatory implications.

Findings

Data caps enable a shift from flat-rate to usage-based pricing.

Optimal revenue and welfare schemes favor usage-based pricing with lower data caps.

Welfare-optimal tariffs have lower fees than revenue-optimal ones, guiding regulatory policies.

Abstract

Internet services are traditionally priced at flat rates; however, many Internet service providers (ISPs) have recently shifted towards two-part tariffs where a data cap is imposed to restrain data demand from heavy users. Although the two-part tariff could generally increase the revenue for ISPs and has been supported by the US FCC, the role of data cap and its optimal pricing structures are not well understood. In this article, we study the impact of data cap on the optimal two-part pricing schemes for congestion-prone service markets. We model users' demand and preferences over pricing and congestion alternatives and derive the market share and congestion of service providers under a market equilibrium. Based on the equilibrium model, we characterize the two-part structures of the revenue- and welfare-optimal pricing schemes. Our results reveal that 1) the data cap provides a mechanism for ISPs to transition from the flat-rate to pay-as-you-go type of schemes, 2) both the revenue and welfare objectives of the ISP will drive the optimal pricing towards usage-based schemes with diminishing data caps, and 3) the welfare-optimal tariff comprises lower fees than the revenue-optimal counterpart, suggesting that regulators might want to promote usage-based pricing but regulate the lump-sum and per-unit fees.