Unix System Overview

Unix System Overview

Chapter 3 Pricing Data Smartly Why do AT&T and Verizon Wireless charge me $10 a GB? Our Cell Phone Bill Data charges make up a significant part of our cell phone bills The data plans in our cellular contracts dictate how much we will pay for the bytes (data) we consume How do cellular providers set these price points? Usage-based vs. flat-rate pricing schemes how usage-based pricing schemes can send better feedback signals than flat-rate, buffet schemes, leading to better sharing of networks

Pricing can be a powerful tool to manage networks Usage-based vs. Flat-rate Pricing Flat-rate pricing buffet: all you can eat with fixed price pros and cons? good if you are hungry unfair light users subsidize heavy users lifestyle can a restaurant keep offering buffet forever without raising $? tragedy of the commons

Usage-based pricing use more, pay more pros and cons? produce less waste and match cost fairer Pricing of Data Plans Data plans include all Internet applications texting, surfing, streaming, video conferencing, etc. How utility bills (electricity, water, gas, etc.) are handled? based on quantity of service consumed use more, pay more

Wireless cellular capacity is expensive to provide and difficult to crank up Flat-Rate Pricing Flat-rate price: one that doesnt depend on how much you actually consume buffet: all you can eat with fixed price Pros and cons? unfair but good if you are hungry not sustainable Make sense when usage of mobile data was low in comparison to voice/text (in the old days) Something happened in 2007 and changed everything!!

introduction of iPhone: demand for data rises sharply (> 50x) as (1) smartphones can surf the web, stream music & videos, and support many data-intensive applications and (2) # of people using Growth of Mobile Data Gigabytes (GB) = billions of bytes = 109 bytes Exabyte (EB) = one billion GB = 1018 bytes ~50% increase per year Buffets have finite amount of food Networks only have a limited capacities to support flow of data to

and from devices 3.1 Our M obile Data P lans Audio Streaming 7.7% FileSharing 1.4% Make up of data in 2014 Web/VoIP 36.4%

Video Streaming 54.6% Distribution of Capacity Demand How light, average, and heaver users are distributed? Heavy users at tail dictate ISPs cost structure Tail has always been long, is getting longer ofand users and longer Tragedy of the Commons

Analogy (in economics) to flat-rate pricing Described by Garrett Hardin, Science, vol. 162, 1968 Herdsmen sharing pasture to feed livestock How to maximize individual profits? Herdsmen selfishly maximize personal gain by adding cattle Every herdsman thinks the same Results overgrazing - too many cattle cause pasture to deplete

tragedy shared by all herdsmen Without proper signal, herdsmen collectively drive pasture to ruin (tragedy) Tragedy of Flat Rate To maximize personal gain, each herdsman keeps adding cattle Under flat-rate data plan, users keep consuming more no additional cost is incurred each time consumer draws from network cost of congestion is shared by all users eventually network buckles under too much

collective demand from everyone negative network effect the more users chasing their own self-interests, the more effect this has on the whole, and eventually an undesirable scenario is reached Efficient price signal - with higher price comes lower demand to avoid tragedy Jobs Inequality of Capacity Since 2007, growth in demand was beginning to outpace growth in the amount of supply that could be provisioned with each additional dollar spent on increasing network capacity 50 P ricing Data

Gap keeps widening in the years since Demand user demand and innovations in data applications proceed faster than supply side (capacity) could keep up with Supply/ $ 2010 Year Illustration 4 T he trends of demand and of supply per dollar for

Jobs Inequality of Capacity No technology can increase its costeffectiveness aggressively each year forever Need a way of regulating demand to keep it in line with capacity, so that network could be shared more effectively How? Usage-based pricing use more, pay more Use More, Pay More Usage-based pricing scheme customers are charged based on how much data they consume (per month) send different pricing signals to consumers

incur a cost for each bucket of GB consumed From Flat-rate to Usage-based When will it happen? usage surges and demand climbs faster than supply e.g., more phones and more capable phones Usage-based pricing helps carriers catch up with cost of supporting rising demand Long tail getting longer demand of heaviest users increases the most heavy users are dominant factor in how much it costs ISP/carrier to manage network As tail gets longer, (cost revenue) increases, when using flat-rate pricing

3.1 Our M obile Data P lans Usage-based Pricing Plan 150 135 Cost ($) 120 105 90 75 60 45 30

15 0 $100 $80 $15/GB $15/GB 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Monthly Usage (GB) Verizon 2016 Baseline flat rate Illustration 7 Verizons five data plan options in J anuary 2016. Each line one of the plans that a customer can choose from. T hein plans have a Above baseline, usage-based pricing kicks flat-rate component below a baseline, and then a usage-based compone Overall charge

is based on beyond totalthat. monthly usage (in these cases, $15 per GB) (how much used, not when, where, or how it is Economics of Happiness There is a free pie of pizza and you are hungry First piece taste great Second piece taste quite good

Third piece taste good, but not as hungry anymore, so its not doing quite as much good as the first or second did Eventually, indifferent to eating another slice. Since its free, you might go for it since it tastes good, but you would not be willing to pay for another at this point Quantifying Happiness via Utility Notion of utility models how a persons happiness changes with amount of resource allocated to her What will the curve look like? Two common characteristics of utility curve

increasing higher quantity, higher utility diminishing marginal returns (e.g., pizza, data) Net Utility (Payoff) Q: how to quantify utility (happiness)? A: one way is to observe how consumers behave with respect to resource in question Whenever making a purchase, make net utility as high as possible Net utility = payoff = [satisfaction price paid] When customer purchases an amount of a resource a specific

unit price (i.e., $10/GB), net utility at = payoff = utility (unit price X quantity Quantity a user purchases depends on price charged a relationship known as demand (desire for Demand Function

Demand function capture the volume of demand as a function of price offered observed via consumer behavior e.g., higher price, lower demand Demand curve: depicts relationship between price and demand a decreasing (never increasing) function of price can take different shapes e.g., linear demand demand price Demand Curve

Assume seller fixed a usage-based (unit) price, from offered (unit) price, obtain users demand (quantity purchased) on curve (total) price paid = ? unit price x quantity (area B) users utility = ? B + A (why? next slide) net utility = ? (B + A) - B = A Compute Utility from Demand Utility function (U) captures how happy a user would

be if a certain quantity of resources (x) is allocated [U(x)] net utility = utility (unit price) X (quantity) net utility = U(x) px How to maximize net utility? pick x that maximizes the above (p) Assume U(x) is concave, take derivative with respect to x and let it be 0 U(x) = p Since U is invertible, x = U-1(p) let x = D(p) demand function utility function determines corresponding demand function

-1 Consumption under Usagebased Pricing Why is it that the quantity a user consumes will be fixed to demand curve in the first place? Or why would a person not be incentivized to consume more, or to purchase less? Answer: Under usage-based pricing, the quantity at the unit price is the one that maximizes users net utility Consider what happens when we decrease or increase quantity

consumed from demand curve.. Consumption under Usagebased Pricing net utility = utility (unit price x quantity) Price charged decreases by B1, and utility decreases by A1+B1 net utility decreases by A1 net utility = utility cost (utility B1 A1) (cost B1) = utility cost A1 Lessened utility outweighs lessened cost

Consumption under Usagebased Pricing net utility = utility (unit price x quantity) While utility rises by A2, price charged rises by A2+B2 net utility decreases by B2 net utility = utility cost (utility + A2) (cost + A2 + B2) = utility cost B2 Added cost outweighs added utility Consumption under Usagebased Pricing This is why, under a usage-based scheme, it is

always in the consumers best interest to base consumption on demand curve Charging a unit price for data gives ISP ability to regulate user demand for data consumption over a mobile network If ISP sets unit price based on cost it incurs to operate and maintain network, this will send an efficient feedback signal to consumers: one that forces (incentivizes) them to internalize the negative externality they are imposing on the network from their consumption ISP cost unit price base usage on demand Consumption under Flat-Rate Does flat-rate pricing also entice users to stay on demand curve?

Flat-rate pricing charges a single, fixed amount irrespective of amount consumed Under this scheme, then, its in the best interest of a customer to grab as much as possible, until there is no more utility to be gained The user should stray from demand curve Think about it: if you pay $20 each month for your data plan, what would dissuade you from streaming 100 videos as opposed to 10? Clearly not money!!! Flat-Rate Pricing Create Waste User consumes to top of demand curve as if price were 0 User surplus = [utility achieved by customer] [cost incurred by provider]

= (A+B+C) (B+C+D) = A D Area D = added cost not counteracted by any gain inFlat utility Waste! Dont take more than your demand calls for rate charge Flat-Rate Pricing Favors Heavy Users Flat rate charge Under flat-rate, to recover capacity cost of ISP,

users are charged based on consumption amount of average user Light user: U1 R < 0 (negative surplus) Heavy user: U2 R > 0 Net Utility vs. User Surplus net utility = utility - unit price x quantity best used for usage-based pricing user surplus = utility - cost incurred by provider better for flat-rate pricing (as there is no notionFlat of rate charge unit price)

ISP has to recover its cost Service Upgrade Shifts demand curve to the right as there will be higher demand if price remains the same while service is enhanced Increase cost-recovering flatrate price (Ul Cl) ? (Uh Ch) Answer: > Flat-rate pricing discourages adoption of higher What does

it imply? quality services by light users (light user sticks to poor service) Smart Data Pricing (SDP) There is no such thing as a free lunch it is impossible to get something for nothing cost of building and operating a network must be paid by someone 3 dimensions of SDP how to charge whom to charge to what to charge for How to Charge?

How should an ISP charge? reward customers for unused data quotas or allow them to trade congestion-dependent pricing time-dependent (charging more at times of day with higher demands) location-dependent (charging less at locations with lower demands) regulates network demand and utilization at a finer scale Whom to Charge to? To whom should an ISP charge? In addition to charging direct consumers of mobile data, network operators may also charge others on food chain

content provider that are getting hits on their sites sponsored content scheme: content providers split cost of network with end users use airport WiFi for a fee or relatively cheap price after watching some advertisement split billing: bring your own device to work employer pays part of mobile data zero-ratig or toll-free data: charged less or not at all for data consumed for specific applications What to Charge for? What should an ISP charge for? data usage end user experience (QoS) Internet transaction

Smart Data Pricing (SDP) Considering how to charge whom to charge to what to charge for all together, SDP can achieve more effective pricing signals to induce efficient sharing Paris Metro Pricing $$ $ How can you charge differently for the exact same service?

No longer the same service as soon as consumers react to the different prices Paris Metro Pricing Creates service differentiation through price differentiation Utility depends on utilization lower price increases demand and utilization, thus reducing utility for those in that service tier higher price

reduces demand and utilization, thus increasing utility for those in that service tier Two-Sided Pricing Whom to charge to? Price of connectivity is shared between content providers (CPs) and end users (EUs) CP may gain from two-sided pricing if subsidizing connectivity to EUs translates into net revenue gain through larger amount of consumption

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