On Optimal Service Differentiation in Congested Network Markets

TL;DR

This paper develops an optimal control model to determine the best service quality and pricing strategies for ISPs to maximize profits while considering resource constraints and user diversity.

Contribution

It introduces an analytical framework for optimal service differentiation, addressing the gap in understanding how ISPs should set service qualities and prices under capacity limits.

Findings

Derived analytical solutions for optimal service qualities and prices.

Identified conditions favoring implementation of service differentiation.

Provided insights on regulatory implications for ISPs.

Abstract

As Internet applications have become more diverse in recent years, users having heavy demand for online video services are more willing to pay higher prices for better services than light users that mainly use e-mails and instant messages. This encourages the Internet Service Providers (ISPs) to explore service differentiations so as to optimize their profits and allocation of network resources. Much prior work has focused on the viability of network service differentiation by comparing with the case of a single-class service. However, the optimal service differentiation for an ISP subject to resource constraints has remained unsolved. In this work, we establish an optimal control framework to derive the analytical solution to an ISP's optimal service differentiation, i.e. the optimal service qualities and associated prices. By analyzing the structures of the solution, we reveal how an ISP should adjust the service qualities and prices in order to meet varying capacity constraints and users' characteristics. We also obtain the conditions under which ISPs have strong incentives to implement service differentiation and whether regulators should encourage such practices.