A result similar to the Odlyzko's "Paris Metro Pricing"

Abstract

We investigate the two-stage competition in which two Internet Service Providers chosse sequentially their capacities and then their prices while facing a flow of new customers who decide to belong to one ISP or the other on the basis of a comparison of access prices and of expected congestion rates. At the equilibrium of the game a vertical differentiation between the Internet Service Providers endogenously emerges: the firm which provides the larger network has the lowest rate of congestion and the highest access price. The I.S.P providing the smallest network (thus the most congested) earns the larger profit. It will be noticed that the spontaneous functioning of oligopolistic competition produces a result similar to the Odlyzko's "Paris Metro Pricing": at the equilibrium the two competitors propose different prices and rates of congestion, the most expensive one being also the least congested.