Optimal pricing and capacity partitioning for tiered access service in virtual networks

Many Internet service providers offer some forms of tiered access service to meet diverse demands of users and to improve the efficiency of network resources. A number of studies have attempted to develop a practical economic model for tiered service, but failed to effectively capture the complex interaction between pricing, resource allocation, and user utility in tiered service. In the current single-layered Internet architecture, since different types of services share the same network resources, it is fundamentally difficult to guarantee service quality differentiation. Therefore, in this paper, to remedy the deficiency of the existing tiered service models and to overcome the inherent limitation of the Internet architecture, we propose a network architectural solution that utilizes network virtualization technology as a means of providing tiered service. We first develop an economic model for the tiered service based on virtual networks, which accounts for the user subscription dynamics taking into account the impacts of access rate regulation. Then, we find the optimal pricing and capacity partitioning by addressing the revenue maximization problem in the tiered service. Numerical results show that the tiered service based on virtual networks can be more profitable than the non-tiered service under proper pricing and capacity partitioning.