Pricing and resource allocation in caching services with multiple levels of quality of service

Network caches are the storage centers in the supply chain for content delivery – the digital equivalent of warehouses. Operated by access networks and other operators, they provide benefits to content publishers in the forms of bandwidth cost reduction, response time improvement, and handling of flash crowds. Yet, caching has not been fully embraced by publishers, because its use can interfere with site personalization strategies and/or collection of visitor information for business intelligence purposes. While recent work has focused on technological solutions to these issues, this paper provides the first study of the managerial issues related to the design and provisioning of incentive-compatible caching services. Starting with a single class of caching service, we find conditions under which the profit-maximizing cache operator should offer the service for free. This occurs when the access networks' bandwidth costs are high and a large fraction of content publishers value personalization and business intelligence. Some publishers will still opt out of the service, i.e., cache bust, as observed in practice. We next derive the conditions under which the profit-maximizing cache operator should provision two vertically differentiated service classes, namely, premium and best effort. Interestingly, caching service differentiation is different from traditional vertical differentiation models, in that the premium and best-effort market segments do not abut. Thus, optimal prices for the two service classes can be set independently and cannibalization does not occur. It is possible for the cache operator to continue to offer the best-effort service for free while charging for the premium service. Furthermore, consumers are better off because more content is cached and delivered faster to them. Finally, we find that declining bandwidth costs will put negative pressure on cache operator profits, unless consumer adoption of broadband connectivity and the availability of multimedia content provide the necessary increase in traffic volume for the caches.