Optimal Pricing and Capacity Allocation in Vertically Differentiated Web Caching Services

Internet infrastructure is a key enabler of e-business. The infrastructure consists of backbone networks (such as UUNET and AT&T), access networks (such as AOL and Earthlink), content delivery networks (CDNs, such as Akamai) and other caching service providers. Together, all of the players make up the digital supply chain for information goods. Caches provisioned by CDNs and other entities are the storage centers, the digital equivalent of warehouses. These caches store and deliver information from the edge of the network and serve to stabilize and add efficiency to content delivery. While the benefits of caching to content providers with regard to scaling content delivery globally, reducing bandwidth costs and response times are well recognized, caching has not become pervasive. This is largely due to misaligned incentives in the delivery chain. Much of the work done to date on Web caching has focused on the technology to provision quality of service and has not dealt with issues of fundamental importance to the business of provisioning caching services, specifically, the design of incentive compatible services, appropriate pricing schemes, and associated resource allocation issues that arise in operating a caching service. We discuss the design of incentive compatible caching services that we refer to as quality of service caching. Pricing plays an important role in aligning the incentives. We develop an analytic model to study the IAP’s optimal pricing and capacity allocation policies.