An Application of Yield Management for Internet Service Providers Suresh K. Nair, 1 Ravi Bapna 2 1 Department of Operations and Information Management, School of Business Administration, U41-IM, University of Connecticut, Storrs, Connecticut 06269-0241 2 College of Business Administration, 214 Hayden Hall, Northeastern University, Boston, Massachusetts 02115 Received March 1999; revised January 2001; accepted 31 January 2001 Abstract: In this paper we study strategies for better utilizing the network capacity of Internet Service Providers (ISPs) when they are faced with stochastic and dynamic arrivals and depar- tures of customers attempting to log-on or log-off, respectively. We propose a method in which, depending on the number of modems available, and the arrival and departure rates of different classes of customers, a decision is made whether to accept or reject a log-on request. The problem is formulated as a continuous time Markov Decision Process for which optimal policies can be readily derived using techniques such as value iteration. This decision maximizes the discounted value to ISPs while improving service levels for higher class customers. The methodology is sim- ilar to yield management techniques successfully used in airlines, hotels, etc. However, there are sufficient differences, such as no predefined time horizon or reservations, that make this model interesting to pursue and challenging. This work was completed in collaboration with one of the largest ISPs in Connecticut. The problem is topical, and approaches such as those proposed here are sought by users. c  2001 John Wiley & Sons, Inc. Naval Research Logistics 48: 348–362, 2001 Keywords: yield management; internet service providers; continuous time MDP 1. INTRODUCTION AND MOTIVATION Internet Service Providers (ISPs), companies that are engaged in providing direct online ac- cess to the Internet to individuals and corporations, are increasingly challenged to keep up with competition from other ISPs and the so-called ‘‘commercial services’’ like America Online and Prodigy. These commercial services do provide access to the Internet, but their real draw is their proprietary content that reflects their tie-ups with particular merchandisers, television channels, and business associates. ISPs have to deal with rapid technological advancements and growing demand from an expanding customer base while at the same time maintaining a desirable cus- tomer service level. It is not uncommon to hear of frustrated users who have been ‘‘bumped,’’ or simply disconnected from the network arbitrarily, or of others who struggle to get in at peak hours—typically lunch hours on business days, evenings, or on days of inclement weather. Recall Correspondence to: S.K. Nair c  2001 John Wiley & Sons, Inc.