Vytautas Valancius, Cristian Lumezanu, Nick Feamster, Ramesh Johari, and Vijay V. Vazirani Sellers Large ISPs National or international reach Buyers Cogent Traffic Invoice Smaller ISPs Enterprises Content providers Stanford University Universities Connectivity is sold at bulk using blended rates 2 Single price in $/Mbps/month Charged each month on aggregate throughput Some flows are costly EU Cost: $$$ Cogent US Cost: $ Some are cheaper to serve Price is set to recover total costs + margin Convenient for ISPs and clients Blended rate Price: $$ Stanford University Can be inefficient! 3 Uniform price yet diverse resource costs Clients Lack of incentives to conserve resources to costly destinations ISPs Lack of incentives to invest in resources to costly destinations Pareto inefficient resource allocation A well studied concept in economics Potential loss to ISP profit and client surplus Alternative: Tiered Pricing 4 Price the flows based on cost and demand Some industries use tiered pricing extensively Parcel services, airlines, train companies Pricing on distance, weight, quality of service Other industries offer limited tiered pricing USPS mail, London’s Tube, Atlanta’s MARTA Limited number of pricing tiers Where is tiered pricing in the Internet? 5 Some ISPs already use limited tiered pricing Regional pricing On/Off-Net Pricing Global, Cost: $$$ Client Revenue: $ Peer No revenue Local Cost: $ Cogent Cogent Price: $$$ Stanford University Price: $ Price: $ Price: $$$ Stanford University Question: How efficient are the current ISP pricing strategies? Can ISPs benefit from more tiers? 6 How can we test the effects of tiered pricing on ISP profits? 1. Demand of different flows Servicing costs of different flows Modeling Data mapping Number crunching Construct an ISP profit model that accounts for: 2. Drive the model with real data Demand functions from real traffic data Servicing costs from real topology data 3. Test the effects of tiered pricing! 7 Profit = Revenue – Costs (for all flows) Flow revenue Price * Traffic Demand Traffic Demand is a function of price How do we model and discover demand functions? Flow cost Servicing Cost * Traffic Demand Servicing Cost is a function of distance How do we model and discover servicing costs? 8 Traffic Demands Current Prices Network Topologies Demand Models Cost Models Demand Functions Relative costs 1. Finding Demand Functions Profit Model 2. Modeling Costs Absolute costs 3. Reconciling cost with demand 9 Canonical commodity demand function: Demand = F(Price, Valuation, Elasticity) Price Inelastic demand Elastic demand Valuation – how valuable flow is Elasticity – how fast demand changes with price Demand How do we find the demand function parameters? Valuation = F-1(Price, Demand, Elasticity) Assumed range of elasticities Current price Current flow demand We mapped traffic data to demand functions! 10 Traffic Demands Current Prices Network Topologies Demand Models Cost Models Demand Functions Relative costs 1. Finding Demand Functions Profit Model 2. Modeling Costs Absolute costs 11 How can we model flow costs? Linear: Concave: Region: Dest. type: ISP topologies and peering information alone can only provide us with relative flow servicing costs. real_costs = γ * relative_costs 12 Traffic Demands Current Prices Network Topologies Demand Models Cost Models Demand Functions Relative costs 1. Finding Demand Functions Profit Model 2. Modeling Costs Absolute costs 3. Reconciling cost with demand 13 Assuming ISP is rational and profit maximizing: Profit = Revenue – Costs = F(price, valuations, elasticities, real_costs) F’(price*, valuations, elasticities, real_costs) = 0 F’ (price*, valuations, elasticities, γ * relative_costs) = 0 γ = F’-1(price*, valuations, elasticities, relative_costs) Data mapping is complete: we know demands and costs! Subject to the noise that is inherent in any structural estimation. 14 Select a number of pricing tiers to test 1. Map flows into pricing tiers 2. 3. 1, 2, 3, etc. Optimal mapping and mapping heuristics Find profit maximizing price for each pricing tier and compute the profit Repeat above for: - 2x demand models - 4x cost models - 3x network topologies and traffic matrices 15 Constant elasticity demand with linear cost model Tier 1: Local traffic Tier 2: The rest of the traffic *Elasticity – 1.1, base cost – 20%, seed price - $20 16 NetFlow records and geo-location information Group flows in to distance buckets Data Set Traffic (TB/day) Local Traffic Bit-Weighted Distance Distance Average (miles) CV CDN 1037 ~30% 1988 0.59 EU ISP 400 ~40% 54 0.70 Abilene 43 ~40% 660 0.54 Approximate measure of flow servicing cost spread 17 Linear Cost Model Concave Cost Model Constant Elasticity Demand Logit Demand 18 Refine demand and cost modeling Hybrid demand and cost models are likely more realistic Establish better metrics that predict the benefit of tiered pricing Establish formal conditions under which demand and cost normalization framework works E.g., can we normalize cost and demand if cost is a product of the unit cost and the log of the demand? Test the framework on other industries 19 ISPs today predominantly use blended rate pricing Some ISPs started using limited tiered pricing Our study shows that having more than 2-3 pricing tiers adds only marginal benefit to the ISP The results hold for wide range of scenarios Different demand and cost models Different network topologies and demands Large range of input parameters Questions? http://valas.gtnoise.net 20 21 Very hard to model! Perhaps requires game-theoretic approach and more data (such as where the topologies overlap, etc.) It is possible to model some effects of competition by treating demand functions as representing residual instead of inherent demand. See Perloff’s “Microeconomics” pages 243-246 for discussion about residual demand. 22 23 We don’t know elasticities, so we test large range of them. The data might be biased already for the traffic because of congestion signalling (maybe real demand is more than we can see). We can’t model competition effects in long term (in fact, no one can.) 24