Pricing Internet access in the presence of user loyalty

• Published in: Netnomics 2010-07, Vol.11 (2), p.119-147
• Main Authors: Biczók, Gergely, Kardos, Sándor, Trinh, Tuan Anh
• Format: Article
• Language: English
• Subjects: Analysis; Brand loyalty; Bundling; Communication networks; Convergence; Data Structures and Information Theory; e-Commerce/e-business; Economic Growth; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; End users; Games; Internet; Internet access; Internet service providers; Investigations; IT in Business; Networks; Pricing; Pricing policies; Strategy; Studies; User behavior
• ISSN: 1385-9587; 1573-7071
• DOI: 10.1007/s11066-010-9050-5

Socio-economic aspects of future communication networks such as pricing models for network providers, network neutrality, and Quality of Experience (QoE) are becoming more and more important as the convergence of networks is in progress. All the above areas share a common interest: the deeper understanding of user behavior. In this paper, as a first step towards a more realistic user model, we investigate customer loyalty and its impact on the pricing competition of Internet Service Providers (ISPs) who sell Internet access to end-users. The main contribution of this paper is twofold. First, we analyze the impact of user loyalty with game-theoretical means motivated by the Bertrand game. We show how loyalty introduces a new equilibrium in a repeated game setting resulting in the cooperation of ISPs. Furthermore, we investigate the case of a differentiated customer population by introducing dual reservation values, and show how it leads to new, pure strategy Nash equilibria indicating that ISPs should make the most out of their respective loyal user base. Second, we construct two novel models for customer loyalty incorporating two important aspects of the users’ purchasing decisions: price sensitivity and inherent uncertainty. We evaluate the impact of user loyalty through these models by extensive simulations in a number of relevant scenarios. In particular, we show how the higher level of loyalty in the user population leads to larger profits for ISPs. We argue that our findings can motivate network researchers to incorporate a finer-grained user behavior model in their investigations on pricing models of network services and other socio-economic issues.