When Should Prices Stay Fixed? On the Chances and Limitations of Spot Pricing in Larger Markets

51 Pages Posted: 30 Nov 2022 Last revised: 11 Apr 2024

See all articles by Ludwig Dierks

Ludwig Dierks

University of Illinois at Chicago - Department of Information and Decision Sciences

Makoto Yokoo

Kyushu University

Date Written: October 13, 2022

Abstract

Selling resources via auctions often seems profit-optimal in theory. Yet in practice, providers most often choose to sell homogeneous resources such as cloud computing instances at fixed prices. While it has been argued that this is explained by relatively non-volatile demand distributions and highly competitive market environments, these arguments only paint a partial picture. Through a formal game theoretic analysis, we show that the relative profit increase of offering resources through a spot pricing mechanism instead of at a fixed price is unbounded as long as a sufficiently competitive outside option exists, even if demand is very non-volatile. To explain the lack of spot pricing in practice, we consider that users might be biased against more complex auction-based mechanisms. We find that in large, non-volatile markets even a very small user bias will turn fixed-pricing profit-optimal if demand is sufficiently large and non-volatile. We derive a sufficient condition under which fixed prices are profit-optimal and illustrate the observed effects through a numerical example.

Keywords: Cloud Computing, Spot Market, Profit Optimization

JEL Classification: D44, D47, L11

Suggested Citation

Dierks, Ludwig and Yokoo, Makoto, When Should Prices Stay Fixed? On the Chances and Limitations of Spot Pricing in Larger Markets (October 13, 2022). Available at SSRN: https://ssrn.com/abstract=4246971 or http://dx.doi.org/10.2139/ssrn.4246971

Ludwig Dierks (Contact Author)

University of Illinois at Chicago - Department of Information and Decision Sciences ( email )

University Hall, Room 2404, M/C 294
Chicago, IL 60607-7124
United States

Makoto Yokoo

Kyushu University ( email )

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