Cloud Pricing: The Spot Market Strikes Back

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 to increase the provider's profit is to sell these idle instances on a spot market where users can be preempted. However, this ignores the possible "market cannibalization'' that may occur in equilibrium. In particular, users who would generate more profit in the provider's existing fixed-price market might move to the spot market and generate less profit. In this paper, we model the provider's profit optimization problem using queuing theory and game theory and analyze the equilibria of the resulting queuing system. Our main result is an easy-to-check condition under which offering a market consisting of fixed-price instances as well as some spot instances (using idle resources) increases the provider's profit over offering only fixed-price instances. Furthermore, we show that under our condition, such a profit increase can always be combined with a Pareto improvement for the users. Finally, we illustrate our results numerically to demonstrate the effects the provider's costs and her strategy have on her profit. Full paper: https://ssrn.com/abstract=3383420