Pricing Access to the Internet with Partial Information

We shall consider two competition problems between service providers with asymmetric information. The utility of each one of them depends on the demand it gets and in its price. The demand itself is also a function of the prices of the providers. In both problems there is one provider (super player or player 1) that has more information than the other (player 2) on the demand function. The more informed provider plays first, and then the second observes the move of the first provider and chooses accordingly its own action: it determines its price per unit demand. In the first problem that we consider, the first provider does not control its price (it has a fixed price known to the other provider which does not depend on the information that is unknown to provider 2). Before player 2 takes its action it receives a signal (or a recommendation) from the more informed player, i.e. from provider 1. The pure actions of provider 1 are thus the possible choices of what signal to send. The second problem that we consider is the same as the first one except that the actions of provider 1 is to choose its price. Since player 2 observes the choice of price of player 1 before it takes its own pricing decision, we can consider the choice of price by player 1 has also a role of signalling. We reduce each one of the problem to an equivalent four by four matrix game.