Post on 28-Dec-2015
The Internet
ISP
Internet Backbone Provider
Internet Backbone Provider
Internet Backbone Provider
ISP
ISP
Big Fixed Costs in Networks
P
Q
AC
What is demand relative to scale?
P
Q
DAC
What is demand relative to scale?
P
Q
D
AC
Internet Backbone
Internet Backbone Provider A
NAPInternet Backbone
Provider C
Internet Backbone Provider B
Sequential Monopoly Broadband service made up of Access and
ISP Assumption of no monopsony power for now
Demand for Broadband (Final product)P = 200 – 10Q
Sequential Monopoly (Con’t) Demand for Broadband (Final product)
P = 200 – 10Q
Access provider bundles and setsMRbband = MCaccess+ Pisp
So Pisp = MRbband -MCaccess
Sequential Monopoly (con’t)
$
Q
D
Broadband Demand
Sequential Monopoly (con’t)
$
Q
D
Broadband Demand
MRbband
Sequential Monopoly (con’t)$
Q
D
Broadband Demand
MRbband
MCaccess
Pisp = MRbband -MCaccess
Sequential Monopoly (con’t)$
Q
D
Broadband Demand
MRbband
MCaccess
Pisp = MRbband -MCaccess
MRisp
Sequential Monopoly (con’t)$
Q
D
Broadband Demand
MRbband
MCaccess
Pisp = MRbband -MCaccess
MRisp
MCisp
Q
Sequential Monopoly (con’t)$
Q
D
Broadband Demand
MRbband
P*
Disp
MRisp
MCisp
Q*
Sequential Monopoly (con’t)$
Q
D
Broadband Demand
MRbband
P*
Disp
MRisp
MCisp
Q*
MCbband
P**
Q**
Sequential Monopoly MathDbband: P = 200 - 10Q
MCisp = 10
MCaccess= 20
Disp= 200 – 20Q – 20 = 180 –20Q
Set MRisp = MCisp 180 – 40Q = 10
Q = 4.25 Pisp = 95, Pbband = 157.5
Solve single monopoly and get Q = 8.5, P= 115.
Sequential Monopoly Profits
isp = (P-MC)* Q = (95 –10)* 4.25 = 361.25
access = (157.5 – 95 - 20)* 4.25 = 180.625
Total = 541.875
Single Monopoly Profits:
monop = (115 – 30)*8.5 = 722.5
Overall welfare increases in this case
Sequential Monopoly (con’t)$
Q
D
Broadband Demand
MRbband
P*
Disp
MRisp
MCisp
Q*
MCbband
P**
Q**
Increased Profit
Price Squeeze?
= (Pu- Cu)*QO + (PD- CD)*Qi(1)
where QO is quantity of others and Qi is firm quantity
If firm sells no upstream, QO = 0
= (PD- CD)*Qi(0)
Decision depends on PC margins and Q’s
Incentive to Squeeze? If Qmarket stays the same, then if
(PD- CD)> (Pu- Cu)
Qmarket ↑
Qmarket ↓
Sequential Monopoly Assumed fixed proportions
Markup can lead to inefficient substitution
Price can rise or fall in this case
Congestion
Too much traffic
Drop packets or delay delivery
Pricing solutions
Congestion Pricing
$
Q
SRMC
c
D
Qs
c + K
Congestion Pricing
$
Q
SRMC
c
D
Qs
c + K
Q*
Peak Load Pricing
$
Q
SRMC
c
Dpeak
Qs
c + K
Doff peak
Without Peak Pricing
$
Q
SRMC
c
Dpeak
Qs
c + K
Doff peak
P*
Loss from overcapacityLoss from
overpricing
QOQp
What Does Peak Pricing Do?
Low value users stop or shift e-mail
High value users get priority (and pay) video conferencing
Shifting Peaks
$
Q
Dpeak
c + K
Doff peak
QOffQPeak
LRMC
Demand forcapacity
Q*
POff
PPeak