The role of data cap in two-part pricing under market competition
Abstract: Internet services are traditionally priced at flat rates; however, many ISPs have recently shifted toward two-part tariffs where a data cap is imposed to restrain data demand from heavy users, and usage over the data cap is charged based on a per-unit fee. Although two-part tariffs could generally increase the revenue for ISPs, the role of data cap and its optimal pricing structures are not well understood. In this article, we discuss the impact of data cap on the optimal twopart pricing schemes for congestion-prone service markets (e.g., broadband or cloud services). In particular, we characterize users demand and values, and derive the market share of ISPs under an equilibrium. Based on this equilibrium model, we characterize the optimal structure of the two-part tariffs under market competition. Our results reveal that 1) the data cap provides a mechanism for ISPs to transition between flat-rate and pay-as-you-go pricing schemes; 2) with growing data demand and network capacity, the optimal two-part structure will move toward usage-based schemes with diminishing data caps; and 3) under intense market competition, the optimal two-part structure will move in an opposite direction toward flat-rate schemes with higher data caps.