Service Adoption and Pricing of Content Delivery Network (CDN) Services

Content Delivery Networks (CDNs) are a vital component of the Internet’s content delivery value chain, servicing nearly a third of the Internet’s most popular content sites. However, in spite of their strategic importance little is known about the optimal pricing policies or adoption drivers of CDNs. We address these questions using analytic models of the market structure for Internet content delivery. We find that, consistent with industry practices, CDNs should provide volume discounts to content providers when traffic burstiness is similar across content providers. However, when different content providers have varying traffic burstiness, as expected in reality, CDNs should provide relatively lower volume discounts, even leading to convex price functions in some cases. Surprisingly, we also find that content providers with bursty traffic provision less infrastructure compared to those with lower burstiness, that CDNs are able to charge more in the presence of bursty traffic, and that content providers with bursty traffic realize lower surplus. Similarly, we find that a pricing policy that accounts for both the mean and variance in traffic such as percentile- based pricing does better than pure volume based pricing. Finally, we show that larger CDN networks can charge higher prices in equilibrium, strengthening any technology-based economies of scale.