The impact of data caps on ISP competition

We consider how data caps affect competition between a cable ISP and a DSL ISP. Utility is a function of users´ relative interest, time devoted to each application, and application performance. Users maximize surplus by making ISP subscription choices and by controlling the time devoted to Internet activities. ISPs maximize profit by competing through tier prices, tier rates, network capacities, data caps and overage charges. We illustrate how users´ utilities are affected by data caps, and the resulting impact upon ISP market shares. The initial incentives for both ISPs to update tier prices and tier rates are predicted. The final Nash equilibrium with data caps is analyzed through simulation, and compared to the Nash equilibrium without data caps. We find that a DSL ISP may not set data caps, and that the use of data caps may thus result in an advantage for a cable ISP over a DSL ISP.