Pricing Data Services: Pricing by Minutes, by Gigs, or by Mega Bytes per Second?

Abstract:     
Motivated by the pervasive discrepancy among the pricing schemes of data services, this paper investigates the selection of pricing metrics (variables) and the corresponding pricing plans. We construct a stylized model in which a monopoly data services seller faces heterogeneous consumers whose utilities depend on the usage and the connection speed. We examine three options for the seller to conduct the second-degree (indirect) price discrimination: by minutes, by giga bytes (Gigs), and by mega bytes per second (Mbps). We show that the after-sales self-selection behaviors have a significant impact on the seller's profitability, and it leads to a first-order influence on the pricing metric selection. We prove that either pricing by Gigs or pricing by Mbps can be optimal. Pricing by Gigs can dominate the pricing by Mbps even if the consumer's utility is more sensitive in changes in the connection speed. We also find that when incorporating the bandwidth costs or congestion costs, pricing by Mbps becomes more attractive as it allows the seller to directly control the congestion effect. These findings may help practitioners to develop their own pricing plans and pricing metrics selection.

Number of Pages in PDF File: 38

Keywords: internet service provider, service pricing, price discrimination, versioning, principal agent model, game theory

JEL Classification: D41, D82, L1

working papers series