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Pricing Strategies and Service Differentiation

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  • Michel Mandjes

Abstract

This paper analyzes a communication network, used by customers with heterogeneous service requirements. We investigate priority queueing as a way to establish service differentiation. It is assumed that there is an infinite population of customers, who join the network as long as their utility (which is a function of the queueing delay) is larger than the price of the service. We focus on the specific situation with two types of users: one type is delay-sensitive ('voice'), whereas the other is delay-tolerant ('data'); these preferences are reflected in their utility curves. Two models are considered: in the first the network determines the priority class of the users, whereas the second model leaves this choice to the users. For both models we determine the prices that maximize the provider's profit. Importantly, these situations do not coincide. Our analysis uses elements from queueing theory, but also from microeconomics and game theory (e.g., the concept of a Nash equilibrium).

Suggested Citation

  • Michel Mandjes, 2004. "Pricing Strategies and Service Differentiation," Netnomics, Springer, vol. 6(1), pages 59-81, April.
    • Handle: RePEc:kap:netnom:v:6:y:2004:i:1:p:59-81
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    Cited by:

    1. Hailing Zhu & Khmaies Ouahada & Andre Nel, 2018. "Optimal Price Subsidy for Universal Internet Service Provision," Sustainability, MDPI, vol. 10(5), pages 1-19, May.
    2. Güler, M. Güray & Bilgiç, Taner & Güllü, Refik, 2014. "Joint inventory and pricing decisions when customers are delay sensitive," International Journal of Production Economics, Elsevier, vol. 157(C), pages 302-312.
    3. Christos Michalakelis & Georgia Dede & Dimitris Varoutas & Thomas Sphicopoulos, 2010. "Estimating diffusion and price elasticity with application to telecommunications," Netnomics, Springer, vol. 11(3), pages 221-242, October.
    4. Paul A. David, 2006. "Economic Policy Analysis and the Internet: Coming to Terms with a Telecommunications Anomaly," Discussion Papers 06-004, Stanford Institute for Economic Policy Research.

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