The Pricing of Critical Applications in the Internet

A number of authors have recently proposed techniques for pricing access to Internet resources in the case of congestion. However, these approaches do not take into account the fact that some applications necessitate guaranteed capacity over a relatively long period of time. This paper discusses some elements of the theory of a mechanism that would accommodate such applications. We begin by reviewing both current practice and theory. We then build infinite horizon stationary models with asymmetry of information, which we first use to show the limits of smart markets (McKie-Mason and Varian). Finally, in a very simplified model, we compute the optimal mechanism, and in a specific example, we show that the optimal mechanism favors the high-type long-term user. J. Japan. Int. Econ., December 1999, 13(4), pp. 281–310. CNRS, IDEI, and GREMAQ, University of Toulouse 1, Toulouse F-31042, France; and University of Toulouse 1, Toulouse F-31042, France. Copyright 1999 Academic Press.Journal of Economic Literature Classification Numbers: C73, D44, D82, L96.