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Internet service classes under competition

  • R. Gibbens
  • R. Mason
  • Richard Steinberg
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    This paper analyzes competition between two Internet service providers (ISPs), either or both of which may choose to offer multiple service classes. In the model analyzed, a social planner who maximizes the total benefit from network usage and a profit maximizing monopolist will both form multiple service classes; but two networks competing to maximize profits will not. The reason is that a competition effect always outweighs a segmentation effect. Networks wish to offer multiple service classes in order to increase user benefits and hence charge higher prices. In doing so, however, they effectively increase the number of points in the service quality range at which they compete. Consequently, in any equilibrium competitive outcome, both ISPs offer a single service class. The analysis has particular implications for the Paris Metro pricing (PMP) proposal, which is considered in depth in this paper, since it suggests that PMP may not be viable under competition

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    File URL: http://eprints.lse.ac.uk/23577/
    File Function: Open access version.
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    Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 23577.

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    Date of creation: Dec 2000
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    Publication status: Published in IEEE Journal on Selected Areas in Communications, December, 2000, 18(12), pp. 2490-2498. ISSN: 0733-8716
    Handle: RePEc:ehl:lserod:23577
    Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
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    Web page: http://www.lse.ac.uk/

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    1. Reitman, David, 1991. "Endogenous Quality Differentiation in Congested Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 39(6), pages 621-47, December.
    2. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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    4. CHAMPSAUR, Paul & ROCHET, Jean-Charles, . "Multiproduct duopolists," CORE Discussion Papers RP -854, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
    6. GABSZEWICZ, Jean J. & SHAKED, Avner & SUTTON, John & THISSE, Jacques-François, . "Segmenting the market: the monopolist's optimal product mix," CORE Discussion Papers RP -707, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    7. Luski, Israel, 1976. "On Partial Equilibrium in a Queuing System with Two Servers," Review of Economic Studies, Wiley Blackwell, vol. 43(3), pages 519-25, October.
    8. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, June.
    9. Alok Gupta & Dale O. Stahl, 1996. "A Stochastic Equilibrium Model of Internet Pricing," CARE Working Papers 9604, The University of Texas at Austin, Center for Applied Research in Economics.
    10. Mason, Robin, 2000. "Simple competitive Internet pricing," European Economic Review, Elsevier, vol. 44(4-6), pages 1045-1056, May.
    11. Gibbens, R. & Mason, R. & Steinberg, R., 1998. "Multiproduct competition between congestible networks," Discussion Paper Series In Economics And Econometrics 9816, Economics Division, School of Social Sciences, University of Southampton.
    12. Chander, Parkash & Leruth, Luc, 1989. "The optimal product mix for a monopolist in the presence of congestion effects : A model and some results," International Journal of Industrial Organization, Elsevier, vol. 7(4), pages 437-449, December.
    13. André DE PALMA & Luc LERUTH, 1989. "Congestion and Game in Capacity: a Duopoly Analysis in the Presence of Network Externalities," Annales d'Economie et de Statistique, ENSAE, issue 15-16, pages 389-407.
    14. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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