Classes of Service Under Perfect Competition And Technological Change: a model for the dynamics of the Internet?
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AbstractCertain services may be provided in a continuous, one-dimensional, ordered range of dierent qualities and a customer requiring a service of quality q can only be oered a quality superior or equal to q. Only a discrete set of dierent qualities will be oered, and a service provider will provide the same service (of xed quality b) to all customers requesting qualities of service inferior or equal to b. Assuming all services (of quality b) are priced identically, a monopolist will choose the qualities of service and the prices that maximize pro t but, under perfect competition, a service provider will choose the (inferior) quality of service that can be priced at the lowest price. Assuming signi cant economies of scale, two fundamentally dierent regimes are possible: either a number of dierent classes of service are oered (DC regime), or a unique class of service oers an unbounded quality of service (UC regime). The DC regime appears in one of two sub-regimes: one, BDC, in which a nite number of classes is oered, the qualities of service oered are bounded and requests for high-quality services are not met, or UDC in which an in nite number of classes of service are oered and every request is met. The types of the demand curve and of the economies of scale, and not the pace of technological change, determine the regime and the class boundaries. The price structure in the DC regime obeys very general laws.