Acquisition of Telecommunications Bandwidth Under Economies of Scale in Size and Duration of Contracts

Significant advances in information technology have brought about increased demand for bandwidth. Buyers of bandwidth often encounter bandwidth prices that are decreasing over time. Additionally, bandwidth prices at any point in time are decreasing in total bandwidth purchased and length of contracts. Therefore, buyers face complex decisions in terms of the number of contracts to buy, their bandwidth, and their lengths. In this article, we formulate models for the acquisition of bandwidth from a buyer's perspective. We begin with a model that allows varying contract durations under deterministic demand and without allowing shortages or overlapping contracts. We then formulate a simpler model, which restricts contract lengths over the planning horizon to be equal. We also solve the problem under probabilistic demand and allowing for shortages, which are satisfied by buying additional bandwidth at a premium. We perform numerical sensitivity analysis to compare the results of the models and illustrate the results with numerical examples. The numerical analyses illustrate that using relatively simple equal-length contracts produces approximately the same results as the more complicated unequal-length contract strategy.

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