Optimal price subsidy for universal internet service provision

Universal service has been adopted by many countries to bridge the digital divide between Information and communication technologies (ICTs) "haves" and "have-nots". The key goal of universal service is to provide telecommunications services to "needy persons" at "reasonable" rate. It is, therefore, critical for policymakers to make decisions on what is a "reasonable" price or subsidy for "needy persons" so that the targeted users do utilize ICTs and benefit from them. This paper analyzes universal service subsidies in providing subsidized Internet access from a pricing point of view through a hypothetical scenario where the subsidized users being subsidized through a price subsidy and non-subsidized users share the same network operated by a service provider. We propose a service differentiation system based on priority queuing to accommodate both groups of users, and model such a system as a Stackelberg game from both a revenue-maximizing service provider perspective and a social welfare maximizing planner's perspective. We then analyze the optimal prices that maximize the service provider's revenue and social welfare respectively, investigate how the revenue maximizing price and social welfare maximizing price are effected by users' willingness to pay and the subsidy ratio, and evaluate the revenue maximizing solution on welfare grounds using the social-maximizing solution as a benchmark. Interestingly, the optimal revenue maximizing solution corresponds to the socially optimal solution in terms of social welfare under the optimum subsidy ratio that maximizes the social welfare. This suggests that the subsidy ratio can be used as a tool to induce the revenue maximizing service provider to set a price that leads to social optimality.