The price of simplicity

Srinivas Shakkottai, R. Srikant, Asuman Ozdaglar, Daron Acemoglu

Research output: Contribution to journalArticle

Abstract

We study revenue-maximizing pricing by a service provider in a communication network and compare revenues from simple pricing rules to the maximum revenues that are feasible. In particular, we focus on flat entry fees as the simplest pricing rule. We provide a lower bound for the ratio between the revenue from this pricing rule and maximum revenue, which we refer to as the Price of Simplicity. We characterize what types of environments lead to a low Price of Simplicity and show that in a range of environments, the loss of revenue from using simple entry fees is small. We then study the Price of Simplicity for a simple non-linear pricing (price discrimination) scheme based on the Paris Metro Pricing. The service provider creates different service classes and charges differential entry fees for these classes. We show that the gain from this type of price discrimination is small, particularly in environments in which the simple entry fee pricing leads to a low Price of Simplicity.

Original languageEnglish (US)
Article number4604751
Pages (from-to)1269-1276
Number of pages8
JournalIEEE Journal on Selected Areas in Communications
Volume26
Issue number7
DOIs
StatePublished - Sep 1 2008

Keywords

  • Game theory
  • Network pricing
  • Paris Metro pricing
  • Revenue efficiency

ASJC Scopus subject areas

  • Computer Networks and Communications
  • Electrical and Electronic Engineering

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    Shakkottai, S., Srikant, R., Ozdaglar, A., & Acemoglu, D. (2008). The price of simplicity. IEEE Journal on Selected Areas in Communications, 26(7), 1269-1276. [4604751]. https://doi.org/10.1109/JSAC.2008.080923