State-dependent pricing and its economic implications

In a packet-switched network, the service provider can charge users a state-dependent price, which depends on the extent to which the network is congested. Alternatively, one can charge users a long-term average price, which is set based on expected demand and capacity availability, but independent of instantaneous network conditions. In this paper, we compare the benefits of different pricing schemes from the service provider, society, and consumer perspectives. Our results suggest that adopting state-dependent pricing improves both profit and total benefits to the society, but may be detrimental to consumer benefits.