The Role of Data Cap in Optimal Two-Part Network Pricing

Internet services are traditionally priced at flat rates; however, many Internet service providers (ISPs) have recently shifted toward two-part tariffs where a data cap is imposed to restrain data demand from heavy users. Although the two-part tariff could generally increase the revenue for ISPs and has been supported by the U.S. FCC, the role of data cap and its optimal pricing structures are not well understood. In this paper, we study the impact of data cap on the optimal two-part pricing schemes for congestion-prone service markets. We model users' demand and preferences over pricing and congestion alternatives and derive the market share and congestion of service providers under a market equilibrium. Based on the equilibrium model, we characterize the two-part structures of the revenue- and welfare-optimal pricing schemes. Our results reveal that: 1) the data cap provides a mechanism for ISPs to make a transition from the flat-rate to pay-as-you-go type of schemes; 2) both of the revenue and welfare objectives will drive ISP's pricing toward more usage-based schemes with diminishing data caps; and 3) the welfare-optimal tariff comprises lower fees than the revenue-optimal counterpart, suggesting that regulators might want to promote usage-based pricing but regulate the lump-sum and per-unit fees.