Optimal Pricing for Integrated-Services Networks with Guaranteed Quality of Service

Integrating multiple services into a single network is becoming increasingly common in today’s telecommunications industry. Driven by the emergence of new applications, many of these services will be offered with guaranteed quality of service. While there are extensive studies of the engineering problems of designing integrated services networks with guaranteed quality of service, related economic problems, such as how to price services offered by this type of network, are not well understood. In this chapter, we analyze the problem of pricing and capacity investment for an integrated-services network with guaranteed quality of service. Based on an optimal control model formulation, we develop a 3-stage procedure to determine the optimal amount of capacity and the optimal price schedule. We show that pricing a network service is similar to pricing a tangible product, except that the marginal cost of producing the product is replaced by the opportunity cost of providing the service, which includes both the opportunity cost of reserving and the opportunity cost of using network capacity. Our findings lays out a framework for making investment and pricing decisions, as well as for the analysis of related economic tradeoffs. The analysis in this chapter assumes an integrated-service network with fixedlength data units such as Asynchronous Transfer Mode (ATM) network. The same approach can be used to analyze variable packet length IP networks offering guaranteed quality of service through the use of protocols such as Resources reSerVation Protocol (RSVP).