Re: Packet level accounting in IP routers?


Marvin Sirbu (ms6b+@andrew.cmu.edu)
Fri, 22 Apr 88 15:10:28 -0400 (EDT)


There is lots of good economics research on how to price for services which are
mostly based on fixed capital investments. Consider local phone service: you
need a wire from your house to the local telephone central office whether you
make one call or many calls. On the other hand, the computer which sets up
calls grows in proportion to the number of calls made, while the cost of the
switch matrix is proportional to total length of all calls. Inter-office trunk
requirements depend upon the volume of calling minutes in the peak hour. Thus
optimal local phone prices should probably have some component which is based
on connection cost (to cover the local loop), some component based on call
frequency, and some component based on call minutes. Moreover, these rates
should be different in peak hours than in off peak hours, because only peak
hour traffic stimulates the need for more trunks. Using pricing to shift usage
from peak to off peak hours reduces the peak trunk requirements. Long distance
telephone rates already make use of this simple fact.

Computer service bureaus have long since learned these theories and have
implemented them in their pricing policies.

Two particularly good articles are:

Mitchell, Bridger M., "Economic Issues in Usage Sensitive Pricing," The RAND
Corporation P-6530, 1980, and
Park, Rolla Edward, and Bridger Mitchell, "Optimal Peak-Load Pricing for Local
Telephone Calls," RAND, R-3404-1-RC, March 1987.

A more accessible article is:
Mitchell, "Optimal Pricing of Local Telephone Service," American Economic
Review, Sept, 1978, and



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