Economic Viability of Paris Metro Pricing for Digital Services

TL;DR

This paper evaluates the economic viability of Paris Metro Pricing (PMP) for digital services, analyzing its profitability and social welfare impact through a general theoretical framework and diverse examples.

Contribution

It provides a unified theoretical analysis with sufficient conditions for PMP's viability, addressing conflicting prior conclusions.

Findings

PMP can be economically viable under certain conditions.

The analysis applies to various digital service examples.

PMP's social welfare effects depend on specific market parameters.

Abstract

Nowadays digital services, such as cloud computing and network access services, allow dynamic resource allocation and virtual resource isolation. This trend can create a new paradigm of flexible pricing schemes. A simple pricing scheme is to allocate multiple isolated service classes with differentiated prices, namely Paris Metro Pricing (PMP). The benefits of PMP are its simplicity and applicability to a wide variety of general digital services, without considering specific performance guarantees for different service classes. The central issue of our study is whether PMP is economically viable, namely whether it will produce more profit for the service provider and whether it will achieve more social welfare. Prior studies had only considered specific models and arrived at conflicting conclusions. In this article, we identify unifying principles in a general setting and derive general sufficient conditions that can guarantee the viability of PMP. We further apply the results to analyze various examples of digital services.