A two-component spot pricing framework for loss-rate guaranteed Internet service contracts

The technological advances in recent years are allowing Internet Service Providers (ISPs) to provide quality of service (QoS) assurance for traffic through their domains. This article develops a spot pricing framework for intra-domain expected bandwidth contract with a loss based QoS guarantee. The framework accounts for both the cost and the risks associated with QoS delivery. A nonlinear pricing scheme is used in pricing for cost recovery; a utility based options pricing approach is developed for risk related pricing. The application of options pricing in Internet services provides a mechanism for fair risk sharing between the provider and the customer, and may be extended to price other uncertainties in QoS guarantees.