Cloud Pricing: The Spot Market Strikes Back
Management Science, 2021
18 Pages Posted: 11 May 2019 Last revised: 1 Apr 2021
Date Written: February 25, 2021
Cloud computing providers must constantly hold many idle compute instances available (e.g., for maintenance or for users with long-term contracts). A natural idea, which should intuitively increase the provider's profit, is to sell these idle instances on a secondary market, for example, via a preemptible spot market. However, this ignores possible "market cannibalization" effects that may occur in equilibrium as well as the additional costs the provider experiences due to preemptions. To study the viability of offering a spot market, we model the provider's profit optimization problem by combining queuing theory and game theory to analyze the equilibria of the resulting queuing system. Our main result is an easy-to-check condition under which a provider can simultaneously achieve a profit increase and create a Pareto improvement for the users by offering a spot market (using idle resources) alongside a fixed-price market. Finally, we illustrate our results numerically to demonstrate the effects that the provider's costs and her strategy have on her profit.
Keywords: Cloud Computing, Queueing Theory, Game Theory, Equilibrium Analysis, Profit Optimization
JEL Classification: D47, L11
Suggested Citation: Suggested Citation