Revenue Share between Layers and Investment Incentive for ISP in the Internet Market

  • Unno Masaru
    NTT Communications Corporation
  • Xu Hua
    Graduate School of Business Sciences, University of Tsukuba

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Other Title
  • インターネット市場におけるレイヤ間収益配分とISPの投資インセンティブ
  • インターネット シジョウ ニ オケル レイヤ カン シュウエキ ハイブン ト ISP ノ トウシ インセンティブ

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Description

In this paper, we consider a revenue-sharing and network investment problem between an Internet service provider (ISP) and a content provider (CP) by applying the dynamic agency theory. We formulate the problem as the principal-agent problem where the ISP is the principal and the CP is the agent. The principal-agent problem is transformed to a stochastic optimal control problem in which the objectives of ISP are to find an optimal revenue-sharing strategy and a network investment strategy, and to advise an incentive compatible effort level to the CP. The sufficient conditions for the existence of the optimal revenue-sharing strategy, the optimal investment strategy and the incentive compatible effort to the CP are obtained. A numerical example is solved to show the existence of such strategies. The practical implications of the results obtained in the paper will also be discussed.

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