Forward Contracts for Complementary Segments of a Communication Network

Congestion-dependent pricing is a form of traffic management that would ensure the efficient allocation of bandwidth between users and applications. As the unpredictability of congestion prices creates revenue uncertainty for network providers and cost uncertainty for users, it has been suggested that longer-term financial agreements such as forward contracts could be used to manage these risks. In a network managed by a single service provider, long-term forward contracts are beneficial for both the provider and the users. We investigate whether forward contracts would be adopted by multiple service providers in a future Internet with congestion-dependent pricing. We develop a novel game-theoretic model of a multi-provider communication network with two complementary segments. Service on the upstream segment is provided by a single Internet Service Provider (ISP) and priced dynamically to maximize profit, while several smaller ISPs sell connectivity on the downstream network segment, with the advance possibility of entering into forward contracts with their users for some or all of their capacity. We show that the equilibrium forward contracting levels are necessarily asymmetric, with one downstream provider entering into fewer forward contracts than the other competitors, thus ensuring a high subsequent downstream price level. In practice, network providers will choose the extent of forward contracting strategically based not only on their risk tolerance, but also on the market structure in the interprovider network and their peers´ actions.