Investment and Market Structure in Congestible Services

Ramesh Johari

Stanford University

Monday  Sept. 25, 2006

4:00 PM, 5130 Upson

Abstract: We consider investment and market structure in a model of congestion-sensitive service provision. Our starting point is a simple model of network routing that has received a great deal of attention in the engineering community, the so-called "selfish routing" model. A continuum of users wish to send data from source to destination, and can choose from several parallel routes. Each route is owned by an independent network provider that sets a price per unit flow along the route. A user's overall disutility is measured as the sum of price and congestion experienced along the chosen route. In contrast to previous work, we consider a model where providers can invest in their routes, to minimize the impact of this congestion externality.

We investigate this model through the Nash equilibria of the pricing and investment game played by providers. We find that returns to investment and the timing of strategic decisions are critical determinants of the outcome of the game. For a broad range of models for which (1) providers choose prices and investments simultaneously, and (2) the model exhibits nonincreasing returns to investment, we show that if a pure strategy Nash equilibrium exists, it is unique, symmetric, and efficient; we also establish conditions for existence of pure strategy Nash equilibrium in special cases. This result does not hold if either (1) or (2) are violated, and we discuss these scenarios as well. We also investigate several extensions, including modeling the entry of providers into the market. We will emphasize the implications of our results for key issues in telecommunications, including wireless Internet service penetration and the viability of source-directed routing.

This is joint work with Gabriel Weintraub and Ben Van Roy.