Pricing internet access for disloyal users: a game-theoretic analysis

ABSTRACT

In this paper we investigate the impact of customer loyalty on the price competition between local Internet Service Providers who sell Internet access to end-users. The main contribution of this paper is threefold. First, we develop a repeated game, and show how cooperation between ISPs resulting in higher profits can be enforced through a threat strategy in the presence of customer loyalty. Second, we investigate the case of a differentiated customer population by introducing dual reservation values, and show how it leads to new, pure strategy Nash equilibra for a wide range of demand functions. Third, we develop two novel models for customer loyalty, along with a simulation tool that is capable of demonstrating the impact of the novel models. We argue that our findings can bring us closer to the understanding of economic interactions among ISPs and, at the same time, can motivate researchers to incorporate a finer-grained user behavior model involving customer loyalty in their investigations of such interactions.

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INDEX TERMS

Primary Classification:
  C. Computer Systems Organization
  C.4 PERFORMANCE OF SYSTEMS
      Subjects: Modeling techniques

Additional Classification:
  J. Computer Applications
  J.4 SOCIAL AND BEHAVIORAL SCIENCES

General Terms:
Economics, Experimentation, Theory

Keywords:
game theory, internet access, loyalty, pricing