Market segmentation using service levels in data networks

The objective ofthis paper is to study a communication system based on a M(X)/D/1 queueing system representing a cell-switch network like Asynchronous Transfer Mode (ATM) network. Network structure consists of a single link modeled as a batch arrival markovian queue with non-preemptive head of the line priority service. Network manager (NM) is assumed to be a decision maker at a Management Information System (MIS) department. This paper establishes the incentive compatible pricing which maximizes the net value of the overall corporation, while the delays have to satisfy the Quality of Service (QoS) guarantees. We obtain structural results for the two priority case in the short run. In equilibrium, we find that the network manager maximizes the price spread between the two priority class services. We prove that as the capacity level increases indefinitely, the market is equally divided among the priority classes. In the first part of the paper, we assume that the users do not respond to network manager's prices. In the second part, we relax this assumption and look at a leader follower game. Users choose their willingness to pay by deciding on how much value they assign to timely transmission of messages after seeing the prices set by the network manager. Our results indicate that unless there is high enough capacity set up ex ante, monopoly network provider cannot price discriminate by offering different quality of service via priority classes. This trade-off between ex ante capacity level choice and ex post price discrimination decision is eliminated if the capacity is set high. It is shown in the network literature that best effort services lead to lower quality of service, in general, for a single service. We show that this holds in multiple priority services as well. We prove that when the capacity is also considered as a decision variable, simultaneous capacity and price setting yields the same optimal level with sequential capacity and price choices.