Exploiting network effects in the provisioning of large scale systems

Authors:
Jayakrishnan Nair;Adam Wierman;Bert Zwart
Affiliations:
California Institute of Technology;California Institute of Technology;CWI, Amsterdam, The Netherlands
Venue:
ACM SIGMETRICS Performance Evaluation Review - Special Issue on IFIP PERFORMANCE 2011- 29th International Symposium on Computer Performance, Modeling, Measurement and Evaluation
Year:
2011

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Abstract

Online services today are characterized by a highly congestion sensitive user base, that also experiences strong positive network effects. A majority of these services are supported by advertising and are offered for free to the end user. We study the problem of optimal capacity provisioning for a profit maximizing firm operating such an online service in the asymptotic regime of a large market size. We show that network effects heavily influence the optimal capacity provisioning strategy, as well as the profit of the firm. In particular, strong positive network effects allow the firm to operate the service with fewer servers, which translates to increased profit.