On-demand or Spot? Selling the cloud to risk-averse customers

TL;DR

This paper explains why cloud providers use both on-demand and spot markets by modeling customer risk attitudes, showing that dual markets increase revenue and welfare, especially for risk-averse customers.

Contribution

It introduces a stylized model demonstrating the prevalence of dual markets due to customer risk heterogeneity, highlighting the importance of risk attitudes in cloud resource allocation.

Findings

Dual markets yield higher revenue and welfare than spot-only markets.

Increased risk aversion leads to higher on-demand market usage.

The model admits a unique equilibrium considering risk attitudes.

Abstract

In Amazon EC2, cloud resources are sold through a combination of an on-demand market, in which customers buy resources at a fixed price, and a spot market, in which customers bid for an uncertain supply of excess resources. Standard market environments suggest that an optimal design uses just one type of market. We show the prevalence of a dual market system can be explained by heterogeneous risk attitudes of customers. In our stylized model, we consider unit demand risk-averse bidders. We show the model admits a unique equilibrium, with higher revenue and higher welfare than using only spot markets. Furthermore, as risk aversion increases, the usage of the on-demand market increases. We conclude that risk attitudes are an important factor in cloud resource allocation and should be incorporated into models of cloud markets.