How to price Internet access for disloyal users under uncertainty

Abstract

It has recently (Trinh 2008; Biczók et al. 2008) been demonstrated that customer loyalty can have a significant impact on Internet service provider (ISP) pricing. However, the results in those works are valid only under the assumption of complete information, i.e., both the ISPs and the customers fully know about each others’ decisions; the question of how Internet access prices are set by the ISP for disloyal users in uncertain circumstances is still largely unsolved. In this paper, we provide a game-theoretic framework to understand the impacts of customer loyalty on ISP price setting under uncertainty. The contribution of the paper is threefold. Firstly, we provide an empirical analysis of the customer loyalty issue by carrying out a survey for the Hungarian ISP market and combine the results with other European ISP markets. Secondly, we model ISPs’ uncertain decisions by using Bayesian games. Based on our game theoretic model, we quantify the effects of uncertainty on ISPs’ price setting and derive strategies to optimize ISPs’ profits under these uncertain conditions. After that, we generalize the results to mixed strategy scenarios. Finally, we develop a simulation tool to validate the theoretical results and to demonstrate our novel loyalty models. We argue that our findings can motivate researchers to incorporate a finer-grained user behavior model involving customer loyalty in their investigations of such interactions.