How Many Tiers? Pricing in the Internet Transit Market

TitleHow Many Tiers? Pricing in the Internet Transit Market
Publication TypeJournal Articles
Year of Publication2011
AuthorsValancius V, Lumezanu C, Feamster N, Johari R, Vazirani VV
JournalSIGCOMM-Computer Communication Review
Pagination194 - 194
Date Published2011///

ISPs are increasingly selling “tiered” contracts, which offer Inter-net connectivity to wholesale customers in bundles, at rates based
on the cost of the links that the traffic in the bundle is traversing.
Although providers have already begun to implement and deploy
tiered pricing contracts, little is known about how to structure them.
Although contracts that sell connectivity on finer granularities im-
prove market efficiency, they are also more costly for ISPs to im-
plement and more difficult for customers to understand. Our goal
is to analyze whether current tiered pricing practices in the whole-
sale transit market yield optimal profits for ISPs and whether better
bundling strategies might exist. In the process, we offer two contri-
butions: (1) we develop a novel way of mapping traffic and topol-
ogy data to a demand and cost model; and (2) we fit this model on
three large real-world networks: an European transit ISP, a content
distribution network, and an academic research network, and run
counterfactuals to evaluate the effects of different bundling strate-
gies. Our results show that the common ISP practice of structuring
tiered contracts according to the cost of carrying the traffic flows
(e.g., offering a discount for traffic that is local) can be suboptimal
and that dividing contracts based on both traffic demand and the
cost of carrying it into only three or four tiers yields near-optimal
profit for the ISP.