On the Economics of Multicasting
A supplier of multicast information services will often be faced with the following problem: Broadcasting to the whole customer base (including non-paying customers) is cheaper than multicasting only to the paying customers. However, broadcasting discourages potential customers from paying. The result is an economic game in which the supplier tries to maximize profit in the face of rational, but not omniscient, behavior by customers. In this work we build a model for such environments, which we believe is both reasonably realistic and amenable to mathematical analysis. The supplier's basic strategy is to broadcast every service for which the fraction of subscribed customers exceeds some threshold. The customers do not know the exact threshold value, however they can estimate the perceived probability of getting services for free. We then model the customers' behavior in such a game. From this model, coupled with some mild assumptions on the supplier's cost structure, we can find the optimal setting of the supplier's broadcast threshold. The solution necessarily depends on choosing functions which describe the customers' utility for the offered services; we study in detail several such choices. In all the examples we studied, our model predicts that the supplier's profits will be maximized if the supplier's broadcast threshold is set below 100%. The loss in revenue due to customers subscribing to fewer services is offset by the cost savings made possible by broadcasting the most popular services to all customers. We found our model to be fairly robust with respect to parameter choices. As such, we believe it can be of value to a supplier in devising a multicast/broadcast strategy, and that broadcasting when subscriptions are sufficiently high is likely to be the approach of choice in maximizing profits.
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