Risk aversion and information asymmetry in the pricing of capacity-on-demand and pay-per-use computing products

Authors:
Phillip M. Yelland
Affiliations:
Sun Microsystems Laboratories, Menlo Park, California
Venue:
Risk aversion and information asymmetry in the pricing of capacity-on-demand and pay-per-use computing products
Year:
2006

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Abstract

Many information technology vendors now supply capacity-on-demand or pay-per-use (here abbreviated simply as COD) products. These allow buyers to pay for processing and/or storage capacity above a base minimum only when and if the additional capacity is used. While there exists a substantial literature dealing with the economics of the related but more technically ambitious utility computing offerings, very little corresponding attention has been paid to COD products (even though the latter are arguably the more widely-deployed to date). This paper examines a selection of microeconomic models intended to shed some light on the pricing of COD products. Particular scrutiny is given to the implications of the buyer's risk aversion and to possible information asymmetries between the buyer and seller regarding the buyer's future usage.