Robust pricing for cloud computing

TL;DR

This paper demonstrates that a simple committed spend pricing mechanism is robustly optimal for cloud service providers facing demand uncertainty, ensuring maximum profit guarantees under various demand distributions.

Contribution

It introduces and proves the optimality of a simple committed spend mechanism for robust pricing in cloud computing with demand uncertainty.

Findings

The committed spend mechanism guarantees the highest profit under all demand distributions with known mean.

Simple pricing schemes are shown to be robust and effective in complex uncertain environments.

Theoretical support is provided for prevalent cloud pricing practices.

Abstract

We study the robust sequential screening problem of a monopolist seller of multiple cloud computing services facing a buyer who has private information about his demand distribution for these services. At the time of contracting, the buyer knows the distribution of his demand of various services and the seller simply knows the mean of the buyer's total demand. We show that a simple "committed spend mechanism" is robustly optimal: it provides the seller with the highest profit guarantee against all demand distributions that have the known total mean demand. This mechanism requires the buyer to commit to a minimum total usage and a corresponding base payment; the buyer can choose the individual quantities of each service and is free to consume additional units (over the committed total usage) at a fixed marginal price. This result provides theoretical support for prevalent cloud computing pricing practices while highlighting the robustness of simple pricing schemes in environments with complex uncertainty.