American Options Based Service Pricing For Virtual Operators

In the recent years, the role of service provider has split into two broad categories: Network Operators, offering services over their networks, and Virtual Operators, providing services over leased resources. What differentiates these players is to a minor extent a matter of enhanced service offer, and primarily a matter of economic objectives and risk attitudes. Essentially, Network Operators own their infrastructures and typically have to sustain both fixed costs (CAPEX) and recurrent costs (OPEX), while Virtual Operators may have a simpler cost structure, mainly consisting of OPEX for hiring the network. Correspondingly, the objectives of these players may differ profoundly: on one hand, infrastructure operators are aimed at recovering their costs at a limited risk with traditional pricing schemes (flat or time based), while the goal of Virtual Operators is to stay in the market, trying to attract as many users as they can over their virtual network through new pricing schemes (time varying, congestion pricing) and at the same time providing comparable QoS levels as Network Operators to be competitive. The paper addresses the problem of co-existence in the market of these two service providers and how arbitrage opportunities, driven by different pricing schemes, can be prevented with the adoption of an American option based pricing scheme by Virtual Operators.