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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
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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0875
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    References listed on IDEAS

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    1. Arun Sundararajan, 2003. "Nonlinear pricing of information goods," Industrial Organization 0307003, University Library of Munich, Germany.
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    Citations

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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. Roman Kozhan & Wing Wah Tham, 2012. "Execution Risk in High-Frequency Arbitrage," Management Science, INFORMS, vol. 58(11), pages 2131-2149, November.
    3. 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.
    4. 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.
    5. 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.
    6. repec:kap:netnom:v:18:y:2017:i:2:d:10.1007_s11066-017-9120-z is not listed on IDEAS

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