Performance-Contingent Pricing for Broadband Services

Market segmentation and price differentiation is considered essential to improve the market efficiency of Internet access and data transport services. The market for cable Internet access exhibits a surprising lack of segmentation, despite a high degree of customer heterogeneity. This article examines the applicability of performance-contingent pricing schemes to broadband Internet access services, with long-term (rather than per-packet) statistical performance guarantees. We study two types of contingent price contracts, with rebate proportional to performance gap, and fixed rebate for below-threshold performance. We show that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. A menu of pricing schemes (allow customers to choose between standard and contingent pricing) works even better: it can increase the firm’s profit and segment the market.