Modeling ISP tier design

We model how Internet Service Providers design tier rates, tier prices, and network capacity. Web browsing and video streaming are considered as the two dominant Internet applications. We propose a novel set of utility functions that depend on a user´s willingness to pay for each application, the performance of each application, and the time devoted to each application. For a monopoly provider, the demand function for each tier is derived as a function of tier price and performance. We first give conditions for the tier rates, tier prices, and network capacity that maximize Internet Service Provider profit, defined as subscription revenue minus capacity cost. We then show how an Internet Service Provider may simplify tier and capacity design, by allowing their engineering department to set network capacity, their marketing department to set tier prices, and both to jointly set tier rates. Numerical results are presented to illustrate the magnitude of the decrease in profit resulting from such a simplified design.