Internet Service Provider Competition with Quasi-Inelastic Demand

This paper studies ISP (Internet Service Provider) competition in the presence of capacity constraint. Different from existing work, we consider a quasi-inelastic demand, which is an inelastic function with elastic property: when price p is not larger than price bR, the amount of demand is 1; when price p is larger than bR (b<1) but not larger than R, the amount of demand is a (a<1); when price p is larger than R, the amount of demand is zero. Like traditional literature, there is a two-stage game in our duopoly model: two firms (i.e., ISP) simultaneously build capacity in the first stage; after it is made public, two firms simultaneously set price. We focus on characterizing and establishing the subgame perfect Nash equilibria in this paper. With quasi-inelastic demand and symmetric capacity cost, we show existing results cannot be fully held. Instead, we get same and different equilibria from existing work. The contributions of our different theoretical results (i.e., different equilibria from existing work) help to understand the basic competition of the customer-ISP access business