Optimal Pricing for Integrated-Services Networks with Guaranteed Quality of Service

Integrating multiple services into a single network is becoming increasingly common in today's telecommunications industry. Driven by the emergence of new applications, many of these services will be offered with guaranteed quality of service. While there are extensive studies of the engineering problems of designing integrated-services networks with guaranteed quality of service, related economic problems, such as how to price services offered by this type of network, are not well understood. In this chapter, we analyze the problem of pricing and capacity investment for an integrated-services network with guaranteed quality of service. Based on an optimal control model formulation, we develop a 3-stage procedure to determine the optimal amount of capacity and the optimal price schedule. We show that pricing a network service is similar to pricing a tangible product, except that the marginal cost of producing the product is replaced by the opportunity cost of providing the service, which includes both the opportunity cost of reserving and the opportunity cost of using network capacity. Our findings lays out a framework for making investment and pricing decisions, as well as for the analysis of related economic tradeoffs. The analysis in this chapter assumes an integrated-service network with fixed-length data units such as Asynchronous Transfer Mode (ATM) network. The same approach can be used to analyze variable packet length IP networks offering guaranteed quality of service through the use of protocols such as Resources reSerVation Protocol (RSVP). The economics of providing multiple types of services through a single network is a question of growing significance to network operators and users. As a result of the rapid development of packet-switching technology, it is becoming increasingly efficient to provide different telecommunication services through one integrated-services network instead of multiple single-service networks, such as telephone networks for voice communications, cable networks for broadcasting video, and the Internet for data transfer. In a packet-switched integrated services network, any piece of information, regardless of whether it is voice, image, or text, is organized as a stream of packets and transmitted over the network. By controlling the packet transmission rate and packet delay distribution of each packet stream, the network can use a single packet transmission technology to provide a variety of transmission services, such as telephony, video, and file transfer. While integrating multiple services into a single network generates economies of scope, heterogeneous services complicate pricing decisions. For example, users watching High-Definition Television (HDTV) through the …