Simulation for risk management: a two-component spot pricing framework for loss-rate guaranteed internet service contracts

  • Authors:
  • Aparna Gupta;Lingyi Zhang;Shivkumar Kalyanaraman

  • Affiliations:
  • Decision Sciences & Engineering Systems, Troy, NY;Decision Sciences & Engineering Systems, Troy, NY;Electrical, Computer & Systems Engineering, Troy, NY

  • Venue:
  • Proceedings of the 35th conference on Winter simulation: driving innovation
  • Year:
  • 2003

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Abstract

The technological advances in recent years are allowing Internet Service Providers (ISPs) to provide Quality of Service (QoS) assurance for traffic through their domains. This article develops a spot pricing framework for intra-domain expected bandwidth contract with a loss based QoS guarantee. The framework accounts for both the cost and the risks associated with QoS delivery. A nonlinear pricing scheme is used in pricing for cost recovery; a utility based options pricing approach is developed for risk related pricing. The application of options pricing in internet services provides a mechanism for fair risk sharing between the provider and the customer, and may be extended to price other uncertainties in QoS guarantees.