A Stochastic Equilibrium Model of Internet Pricing

Perhaps the greatest technological innovation of the next several decades will be universal access and utilization of the Internet. Already congestion is becoming a serious impediment to efficient utilization. We introduce a stochastic equilibrium concept for a general mathematical model of the Internet, and demonstrate that the efficient social welfare maximizing stochastic allocation of Internet traffic can be supported by optimal congestion prices. We further demonstrate that approximately optimal prices can be readily computed and implemented in a decentralized system by constructing a large computer simulation model. We also address the alternative of building excess capacity to avoid congestion.