Dynamic Bandwidth Pricing: Provision Cost, Market Size, Effective Bandwidths and Price Games

Nowadays, in the markets of broadband access services, traditional contracts are of “static” type. Customers buy the right to use a specific amount of resources for a specific period of time. On the other hand, modern services and applications render the demand for bandwidth highly variable and bursty. New types of contracts emerge (“dynamic contracts”) which allow customers to dynamically adjust their bandwidth demand. In such an environment, we study the case of a price competition situation between two providers of static and dynamic contracts. We investigate the resulting reaction curves, search for the existence of an equilibrium point and examine if and how the market is segmented between the two providers. Our first model considers simple, constant provision costs. We then extend the model to include costs that depend on the multiplexing capabilities that the contracts offer to the providers, taking into consideration the size of the market. We base our analysis on the theory of effective bandwidths and investigate the new conditions that allow the provider of dynamic contracts to enter the market.