An Analysis of Two-Sided Internet Pricing

The Internet provides the infrastructure to connect content providers (CPs) with their end-users. Thus, its role could be considered as a two-sided platform and its pricing scheme could be two-sided as well. Although the last-mile access ISPs used to only charge on a single side, i.e., the end-user side, they start thinking about charging CPs for accessing their users. This is similar to what telephony operators do normally and is driven by the pressure of lack of investment. In this work, we propose a two-sided model of an access ISP, which captures the capacity of the ISP, the demands from both the CP and end-users sides, and the resulting system congestion and throughput of the CPs. Through this two-sided model, we study the two-sided pricing of the ISP and characterize the conditions of optimal pricing under which the ISP maximizes its revenue. We find that which side of the market should the ISP charge largely more depends on the elasticity of demand on both sides of the market.