Pricing of risk for loss guaranteed intra-domain internet service contracts

The Internet today offers primarily a best-effort service. Research and technology development efforts are currently underway to allow provisioning of better than best-effort Quality of Service (QoS) assurances. The residual uncertainty in QoS can be managed using pricing strategies. In this article, we develop a spot pricing framework for intra-domain expected bandwidth contracts with loss-based QoS guarantees. The framework builds on a nonlinear pricing scheme for cost recovery from earlier work and extends it to price risk. A utility-based options pricing approach is developed to account for the uncertainties in delivering loss guarantees. Application of options pricing techniques in Internet services provides a mechanism for fair risk sharing between the provider and the customer, and may be extended to price other uncertainties in QoS guarantees.