  ISPs are increasingly selling "tiered" contracts, which offer Internet
connectivity to wholesale customers in bundles, at rates based on the cost of
the links that the traffic in the bundle is traversing. Although providers have
already begun to implement and deploy tiered pricing contracts, little is known
about how such pricing affects ISPs and their customers. While contracts that
sell connectivity on finer granularities improve market efficiency, they are
also more costly for ISPs to implement and more difficult for customers to
understand. In this work we present two contributions: (1) we develop a novel
way of mapping traffic and topology data to a demand and cost model; and (2) we
fit this model on three large real-world networks: an European transit ISP, a
content distribution network, and an academic research network, and run
counterfactuals to evaluate the effects of different pricing strategies on both
the ISP profit and the consumer surplus. We highlight three core findings.
First, ISPs gain most of the profits with only three or four pricing tiers and
likely have little incentive to increase granularity of pricing even further.
Second, we show that consumer surplus follows closely, if not precisely, the
increases in ISP profit with more pricing tiers. Finally, the common ISP
practice of structuring tiered contracts according to the cost of carrying the
traffic flows (e.g., offering a discount for traffic that is local) can be
suboptimal and that dividing contracts based on both traffic demand and the
cost of carrying it into only three or four tiers yields near-optimal profit
for the ISP.
