When free riding is the best choiceThe case of network charges for content

providers

Maurizio Naldi · Giuseppe D’Acquisto

Universita di Roma “Tor Vergata”

ICQT 2013Zurich · 14 October 2013

When free riding is the best choiceThe case of network charges for content

providers

Maurizio Naldi · Giuseppe D’Acquisto

Universita di Roma “Tor Vergata”

ICQT 2013Zurich · 14 October 2013

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

2/15

Network charges

I Content providers populate the network withcontents...

I ..and that’s what customers want...I ...but they also have to pay the network provider which

wants a share in the game...

Is network charging the best strategy?

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

2/15

Network charges

I Content providers populate the network withcontents...

I ..and that’s what customers want...I ...but they also have to pay the network provider which

wants a share in the game...

Is network charging the best strategy?

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

2/15

Network charges

I Content providers populate the network withcontents...

I ..and that’s what customers want...

I ...but they also have to pay the network provider whichwants a share in the game...

Is network charging the best strategy?

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

2/15

Network charges

I Content providers populate the network withcontents...

I ..and that’s what customers want...I ...but they also have to pay the network provider which

wants a share in the game...

Is network charging the best strategy?

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

2/15

Network charges

I Content providers populate the network withcontents...

I ..and that’s what customers want...I ...but they also have to pay the network provider which

wants a share in the game...

Is network charging the best strategy?

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

3/15

Contents

I Stakeholders and economic relationshipsI Neutral and non neutral behaviourI A game-theoretic modelI Impact of network charges

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

3/15

Contents

I Stakeholders and economic relationships

I Neutral and non neutral behaviourI A game-theoretic modelI Impact of network charges

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

3/15

Contents

I Stakeholders and economic relationshipsI Neutral and non neutral behaviour

I A game-theoretic modelI Impact of network charges

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

3/15

Contents

I Stakeholders and economic relationshipsI Neutral and non neutral behaviourI A game-theoretic model

I Impact of network charges

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

3/15

Contents

I Stakeholders and economic relationshipsI Neutral and non neutral behaviourI A game-theoretic modelI Impact of network charges

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

4/15

The stakeholders

The contentproviders

The networkprovider

Theadvertisers

Thecustomer

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

4/15

The stakeholders

The contentproviders

The networkprovider

Theadvertisers

Thecustomer

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

4/15

The stakeholders

The contentproviders

The networkprovider

Theadvertisers

Thecustomer

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

4/15

The stakeholders

The contentproviders

The networkprovider

Theadvertisers

Thecustomer

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

4/15

The stakeholders

The contentproviders

The networkprovider

Theadvertisers

Thecustomer

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

5/15

How the money flows

F P

vF vP

N

tF tP

U

pF

pS

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

5/15

How the money flows

F P

vF vP

N

tF tP

U

pF

pS

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

5/15

How the money flows

F P

vF vP

N

tF tP

U

pF

pS

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

5/15

How the money flows

F P

vF vP

N

tF tP

U

pF

pS

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

5/15

How the money flows

F P

vF vP

N

tF tP

U

pF

pS

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

6/15

The demand functions for free and paidservices

Self-elasticity is negativeCross-elasticity is positive

DF =D∗

F1+α

(1 − tF

vF

)(1 + α pS

p∗S

)(1 − pN

p∗N

)DP = D∗

P

(1 − β tP

vP

)(1 − pS

p∗S

)(1 − pN

p∗N

)

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

6/15

The demand functions for free and paidservices

Self-elasticity is negative

Cross-elasticity is positive

DF =D∗

F1+α

(1 − tF

vF

)(1 + α pS

p∗S

)(1 − pN

p∗N

)DP = D∗

P

(1 − β tP

vP

)(1 − pS

p∗S

)(1 − pN

p∗N

)

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

6/15

The demand functions for free and paidservices

Self-elasticity is negativeCross-elasticity is positive

DF =D∗

F1+α

(1 − tF

vF

)(1 + α pS

p∗S

)(1 − pN

p∗N

)DP = D∗

P

(1 − β tP

vP

)(1 − pS

p∗S

)(1 − pN

p∗N

)

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

6/15

The demand functions for free and paidservices

Self-elasticity is negativeCross-elasticity is positive

DF =D∗

F1+α

(1 − tF

vF

)(1 + α pS

p∗S

)(1 − pN

p∗N

)DP = D∗

P

(1 − β tP

vP

)(1 − pS

p∗S

)(1 − pN

p∗N

)

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

7/15

Strategic decisions

Both players use retail prices as their leverage

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

7/15

Strategic decisions

Both players use retail prices as their leverage

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

7/15

Strategic decisions

Both players use retail prices as their leverage

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

7/15

Strategic decisions

Both players use retail prices as their leverage

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

8/15

The Nash equilibrium

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

9/15

The Nash equilibrium under free riding

If there are no transport prices, there are no strategicinteractions

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

9/15

The Nash equilibrium under free ridingIf there are no transport prices, there are no strategic

interactions

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

10/15

The regulatory intervention

Giving the network provider the power to set transportprices may lead to unfair treatment

Transport prices may be better set by the regulatoryauthority according to...

1. The principle of social welfare maximization2. The principle of equal treatment tF = tP

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

10/15

The regulatory intervention

Giving the network provider the power to set transportprices may lead to unfair treatment

Transport prices may be better set by the regulatoryauthority according to...

1. The principle of social welfare maximization2. The principle of equal treatment tF = tP

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

10/15

The regulatory intervention

Giving the network provider the power to set transportprices may lead to unfair treatment

Transport prices may be better set by the regulatoryauthority according to...

1. The principle of social welfare maximization2. The principle of equal treatment tF = tP

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

10/15

The regulatory intervention

Giving the network provider the power to set transportprices may lead to unfair treatment

Transport prices may be better set by the regulatoryauthority according to...

1. The principle of social welfare maximization

2. The principle of equal treatment tF = tP

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

10/15

The regulatory intervention

Giving the network provider the power to set transportprices may lead to unfair treatment

Transport prices may be better set by the regulatoryauthority according to...

1. The principle of social welfare maximization2. The principle of equal treatment tF = tP

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

11/15

The Nash equilibrium (equal transport prices)

There are no strategic interactionsThe effect on retail prices is symmetric

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

11/15

The Nash equilibrium (equal transport prices)There are no strategic interactions

The effect on retail prices is symmetric

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

12/15

A sample scenario

Parameter Value

p∗N 3.67 ¤/GB

p∗S 3.23 ¤/GB

D∗F 20.62 GB/month

D∗P 30.94 GB/month

vF 0.5 ¤/GBvP 0.2 ¤/GBα 1β 0.5

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

12/15

A sample scenario

Parameter Value

p∗N 3.67 ¤/GB

p∗S 3.23 ¤/GB

D∗F 20.62 GB/month

D∗P 30.94 GB/month

vF 0.5 ¤/GBvP 0.2 ¤/GBα 1β 0.5

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

13/15

Regulated transport pricesMaximum social welfare

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (paid)

0

10

20

30

40

50

60

Soci

al W

elfa

re

00.250.50.75

Normalized Transport Pricefree

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (free)

0

10

20

30

40

50

60

Soci

al W

elfa

re

00.250.50.75

Normalized Transport Pricepaid

The bill-and-keep approach is best

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

13/15

Regulated transport pricesMaximum social welfare

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (paid)

0

10

20

30

40

50

60

Soci

al W

elfa

re

00.250.50.75

Normalized Transport Pricefree

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (free)

0

10

20

30

40

50

60

Soci

al W

elfa

re

00.250.50.75

Normalized Transport Pricepaid

The bill-and-keep approach is best

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

13/15

Regulated transport pricesMaximum social welfare

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (paid)

0

10

20

30

40

50

60

Soci

al W

elfa

re

00.250.50.75

Normalized Transport Pricefree

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (free)

0

10

20

30

40

50

60

Soci

al W

elfa

re

00.250.50.75

Normalized Transport Pricepaid

The bill-and-keep approach is best

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

14/15

Unregulated transport prices

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (paid)

0

10

20

30

40

Rev

enue

s

00.250.50.75

Normalized Transport Pricefree

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (free)

0

5

10

15

20

25

30

Rev

enue

s

00.250.50.75Equal

Normalized Transport Pricepaid

Charging for transport depresses demand and revenues

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

14/15

Unregulated transport prices

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (paid)

0

10

20

30

40

Rev

enue

s

00.250.50.75

Normalized Transport Pricefree

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (free)

0

5

10

15

20

25

30

Rev

enue

s

00.250.50.75Equal

Normalized Transport Pricepaid

Charging for transport depresses demand and revenues

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

14/15

Unregulated transport prices

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (paid)

0

10

20

30

40

Rev

enue

s

00.250.50.75

Normalized Transport Pricefree

0 0.2 0.4 0.6 0.8 1Normalized Transport Price (free)

0

5

10

15

20

25

30

Rev

enue

s

00.250.50.75Equal

Normalized Transport Pricepaid

Charging for transport depresses demand and revenues

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

15/15

Conclusions

I We have examined the impact of network (transport)charges on retail prices and revenues through agame-theoretic model

I We have provided the solution of the game in closedform

I For a typical scenario, network charges lead neither tothe maximum social welfare nor to the maximumrevenues for the network provider

I Free riding for the content providers appears as thebest choice

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

15/15

Conclusions

I We have examined the impact of network (transport)charges on retail prices and revenues through agame-theoretic model

I We have provided the solution of the game in closedform

I For a typical scenario, network charges lead neither tothe maximum social welfare nor to the maximumrevenues for the network provider

I Free riding for the content providers appears as thebest choice

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

15/15

Conclusions

I We have examined the impact of network (transport)charges on retail prices and revenues through agame-theoretic model

I We have provided the solution of the game in closedform

I For a typical scenario, network charges lead neither tothe maximum social welfare nor to the maximumrevenues for the network provider

I Free riding for the content providers appears as thebest choice

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

15/15

Conclusions

I We have examined the impact of network (transport)charges on retail prices and revenues through agame-theoretic model

I We have provided the solution of the game in closedform

I For a typical scenario, network charges lead neither tothe maximum social welfare nor to the maximumrevenues for the network provider

I Free riding for the content providers appears as thebest choice

Network charges

Naldi-D’Acquisto

Introduction

The pricing game

Sample case

Conclusions

15/15

Conclusions

I We have examined the impact of network (transport)charges on retail prices and revenues through agame-theoretic model

I We have provided the solution of the game in closedform

I For a typical scenario, network charges lead neither tothe maximum social welfare nor to the maximumrevenues for the network provider

I Free riding for the content providers appears as thebest choice