A Comparative Evaluation of Internet Pricing Models: Smart Markets and Dynamic Capacity Contracting

Internet pricing is receiving increased attention in industry and academia. In this paper, we report the results of comparing two Internet pricing models. Using simulation techniques, we evaluate the technical and economic efficiencies of the Smart Market model proposed by MacKie-Mason & Varian (1993) and compare it with Dynamic Capacity Contracting, a pricing scheme that we have developed. Dynamic Capacity Contracting is a congestion-sensitive pricing model implementable in the differentiated service architecture of the Internet. The central idea of congestion-sensitive pricing is that, based on congestion monitoring mechanisms, a network could raise prices and vary contract terms dynamically. Our results indicate that while the smart market model achieves a higher economic efficiency, it results in poor technical performance of the network. On the other hand, the dynamic contracting model achieves a better balance of economic and technical efficiencies. We discuss the implications of our work and identify future research directions.