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Service Adoption and Pricing of Content Delivery Network (CDN) Services

Author

Listed:
  • Kartik Hosanagar

    (Operations and Information Management, The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

  • John Chuang

    (School of Information Management and Systems, University of California at Berkeley, Berkeley, California 94720)

  • Ramayya Krishnan

    (H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • Michael D. Smith

    (H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Content delivery networks (CDNs) are a vital component of the Internet's content delivery value chain, servicing nearly a third of the Internet's most popular content sites. However, in spite of their strategic importance, little is known about the optimal pricing policies or adoption drivers of CDNs. We address these questions using analytic models of CDN pricing and adoption under Markovian traffic and extend the results to bursty traffic using numerical simulations. When traffic is Markovian, we find that CDNs should provide volume discounts to content providers. In addition, the optimal pricing policy entails lower emphasis on value-based pricing and greater emphasis on cost-based pricing as the relative density of content providers with high outsourcing costs increases. However, when traffic is bursty and content providers have varying levels of traffic burstiness, volume discounts may be suboptimal and may even be replaced by volume taxes. Finally, when there is heterogeneity in burstiness across content providers, a pricing policy that accounts for both the mean and variance in traffic such as percentile-based pricing is more profitable than traditional volume-based pricing (metering bytes delivered in a given time window). This finding is in contrast to the current practices of many CDN firms that use traditional volume-based pricing.

Suggested Citation

  • Kartik Hosanagar & John Chuang & Ramayya Krishnan & Michael D. Smith, 2008. "Service Adoption and Pricing of Content Delivery Network (CDN) Services," Management Science, INFORMS, vol. 54(9), pages 1579-1593, September.
    • Handle: RePEc:inm:ormnsc:v:54:y:2008:i:9:p:1579-1593
    DOI: 10.1287/mnsc.1080.0875
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    References listed on IDEAS

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    Cited by:

    1. Baake, Pio & Sudaric, Slobodan, 2018. "Net Neutrality, Prioritization and the Impact of Content Delivery Networks," Rationality and Competition Discussion Paper Series 102, CRC TRR 190 Rationality and Competition.
    2. Yiting Xing & Ling Li & Zhuming Bi & Marzena Wilamowska‐Korsak & Li Zhang, 2013. "Operations Research (OR) in Service Industries: A Comprehensive Review," Systems Research and Behavioral Science, Wiley Blackwell, vol. 30(3), pages 300-353, May.
    3. Elias Vathias & Stathes Hadjiefthymiades, 2022. "A stock options metaphor for content delivery networks," Netnomics, Springer, vol. 22(2), pages 195-230, October.
    4. Baake, Pio & Sudaric, Slobodan, 2019. "Net neutrality and CDN intermediation," Information Economics and Policy, Elsevier, vol. 46(C), pages 55-67.
    5. Elias Vathias & Eleftheria Katsarou & Stathes Hadjiefthymiades, 2017. "A secondary market metaphor for content delivery networks," Netnomics, Springer, vol. 18(2), pages 183-214, December.
    6. Roman Kozhan & Wing Wah Tham, 2012. "Execution Risk in High-Frequency Arbitrage," Management Science, INFORMS, vol. 58(11), pages 2131-2149, November.
    7. Monica Johar & Nanda Kumar & Vijay Mookerjee, 2012. "Content Provision Strategies in the Presence of Content Piracy," Information Systems Research, INFORMS, vol. 23(3-part-2), pages 960-975, September.
    8. Kartik Hosanagar & Yong Tan, 2012. "Cooperative Cashing? An Economic Analysis of Document Duplication in Cooperative Web Caching," Information Systems Research, INFORMS, vol. 23(2), pages 356-375, June.
    9. Anja Lambrecht & Katja Seim & Naufel Vilcassim & Amar Cheema & Yuxin Chen & Gregory Crawford & Kartik Hosanagar & Raghuram Iyengar & Oded Koenigsberg & Robin Lee & Eugenio Miravete & Ozge Sahin, 2012. "Price discrimination in service industries," Marketing Letters, Springer, vol. 23(2), pages 423-438, June.
    10. Debasis Mitra & Abhinav Sridhar, 2018. "The Case for Formation of ISP-Content Providers Consortiums by Nash Bargaining for Internet Content Delivery," Papers 1810.10660, arXiv.org.
    11. Elias Vathias & Stathes Hadjiefthymiades, 2021. "A stock options metaphor for content delivery networks," Netnomics, Springer, vol. 22(2), pages 195-230, December.

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