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
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