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Internet services are traditionally priced at flat rates; however, manyInternet service providers (ISPs) have recently shifted towards two-parttariffs where a data cap is imposed to restrain data demand from heavy users.Although the two-part tariff could generally increase the revenue for ISPs andhas been supported by the US FCC, the role of data cap and its optimal pricingstructures are not well understood. In this article, we study the impact ofdata cap on the optimal two-part pricing schemes for congestion-prone servicemarkets. We model users' demand and preferences over pricing and congestionalternatives and derive the market share and congestion of service providersunder a market equilibrium. Based on the equilibrium model, we characterize thetwo-part structures of the revenue- and welfare-optimal pricing schemes. Ourresults reveal that 1) the data cap provides a mechanism for ISPs to transitionfrom the flat-rate to pay-as-you-go type of schemes, 2) both the revenue andwelfare objectives of the ISP will drive the optimal pricing towardsusage-based schemes with diminishing data caps, and 3) the welfare-optimaltariff comprises lower fees than the revenue-optimal counterpart, suggestingthat regulators might want to promote usage-based pricing but regulate thelump-sum and per-unit fees.

The Role of Data Cap in Optimal Two-part Network Pricing