Pricing for Local and Global Wi-Fi Markets

This paper analyzes two pricing schemes commonly used in Wi-Fi markets: the flat-rate and the usage-based pricing. The flat-rate pricing encourages the maximum usage, while the usage-based pricing can flexibly attract more users especially those with low valuations in mobile Internet access. First, we use theoretical analysis to compare the two schemes and show that for a single provider in a market, as long as the Wi-Fi capacity is abundant, the flat-rate pricing leads to more revenue. Second, we study how a global provider (e.g., Skype) collaborates with this monopolist in each local market to provide a global Wi-Fi service. We formulate the interactions between the global and local providers as a dynamic game. In Stage I, the global provider bargains with the local provider in each market to determine the global Wi-Fi service price and revenue sharing agreement. In Stage II, local users and travelers choose local or global Wi-Fi services. We analytically show that the global provider prefers to use the usage-based pricing to avoid a severe competition with the local provider. At the equilibrium, the global provider always shares the majority of his revenue with the local provider to incentivize the cooperation. Finally, we analytically study how the interaction changes if the local market has more than one local provider. In this case, the global provider can integrate the coverages of multiple local providers and provide a better service. Compared to the local monopoly case, local market competition enables the global provider to share less revenue with each of the local providers. However, we numerically show that the global provider's revenue could decrease, as he shares his revenue with more providers and can only charge a lower price.