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Risk Management and Optimal Pricing in Online Storage Grids

Author

Listed:
  • Sanjukta Das

    (Department of Management Science and Systems, State University of New York at Buffalo, Buffalo, New York 14260)

  • Anna Ye Du

    (Department of Management Science and Systems, State University of New York at Buffalo, Buffalo, New York 14260)

  • Ram Gopal

    (Department of Operations and Information Management, University of Connecticut, Storrs, Connecticut 06269)

  • R. Ramesh

    (Department of Management Science and Systems, State University of New York Buffalo, Buffalo, New York 14260)

Abstract

Online storage service providers grant a way for companies to avoid spending resources on maintaining their own in-house storage infrastructure and thereby allowing them to focus on their core business activities. These providers, however, follow a fixed, posted pricing strategy that charges the same price in each time period and thus bear all the risk arising out of demand uncertainties faced by their client companies. We examine the effects of providing a spot market with dynamic prices and forward contracts to hedge against future revenue uncertainty. We derive revenue-maximizing spot and forward prices for a single seller facing a known set of buyers. We perform a simulation study using publicly available traffic data regarding Amazon S3 clients from Alexa.com to validate our analytical results. Our field study supports our analysis and indicates that spot markets alone can enhance revenues to Amazon, but this comes at the cost of increased risks due to the increased market share in the spot markets. Furthermore, adding a forward contract feature to the spot markets can reduce risks while still providing the benefits of enhanced revenues. Although the buyers incur an increase in costs in the spot market, adding a forward contract does not cause any additional cost increase while transferring the risk to the buyers. Thus, storage grid providers can greatly benefit by applying a forward contract alongside the spot market.

Suggested Citation

  • Sanjukta Das & Anna Ye Du & Ram Gopal & R. Ramesh, 2011. "Risk Management and Optimal Pricing in Online Storage Grids," Information Systems Research, INFORMS, vol. 22(4), pages 756-773, December.
    • Handle: RePEc:inm:orisre:v:22:y:2011:i:4:p:756-773
    DOI: 10.1287/isre.1100.0288
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    References listed on IDEAS

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    1. Ravi Bapna & Sanjukta Das & Robert Day & Robert Garfinkel & Jan Stallaert, 2011. "A Clock-and-Offer Auction Market for Grid Resources When Bidders Face Stochastic Computational Needs," INFORMS Journal on Computing, INFORMS, vol. 23(4), pages 630-647, November.
    2. Anna Ye Du & Xianjun Geng & Ram Gopal & R. Ramesh & Andrew B. Whinston, 2008. "Capacity Provision Networks: Foundations of Markets for Sharable Resources in Distributed Computational Economies," Information Systems Research, INFORMS, vol. 19(2), pages 144-160, June.
    3. Ravi Bapna & Sanjukta Das & Robert Garfinkel & Jan Stallaert, 2008. "A Market Design for Grid Computing," INFORMS Journal on Computing, INFORMS, vol. 20(1), pages 100-111, February.
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    Citations

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    Cited by:

    1. Hsing Kenneth Cheng & Zhi Li & Andy Naranjo, 2016. "Research Note—Cloud Computing Spot Pricing Dynamics: Latency and Limits to Arbitrage," Information Systems Research, INFORMS, vol. 27(1), pages 145-165, March.
    2. Zhiling Guo & Jin Li & Ram Ramesh, 2019. "Optimal Management of Virtual Infrastructures Under Flexible Cloud Service Agreements," Information Systems Research, INFORMS, vol. 30(4), pages 1424-1446, April.
    3. Anna Ye Du & Sanjukta Das & R. Ramesh, 2013. "Efficient Risk Hedging by Dynamic Forward Pricing: A Study in Cloud Computing," INFORMS Journal on Computing, INFORMS, vol. 25(4), pages 625-642, November.
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    5. Michaela Sprenger & Tobias Mettler & Robert Winter, 0. "A viability theory for digital businesses: Exploring the evolutionary changes of revenue mechanisms to support managerial decisions," Information Systems Frontiers, Springer, vol. 0, pages 1-24.
    6. Jin Xiao & Yuhang Tian & Yanlin Jia & Xiaoyi Jiang & Lean Yu & Shouyang Wang, 2023. "Black-Box Attack-Based Security Evaluation Framework for Credit Card Fraud Detection Models," INFORMS Journal on Computing, INFORMS, vol. 35(5), pages 986-1001, September.
    7. Tobias Widmer & Paul Karaenke & Vijayan Sugumaran, 2021. "Two‐sided service markets: Effects of quality differentiation on market efficiency," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 588-604, April.
    8. Shuai Yuan & Sanjukta Das & R. Ramesh & Chunming Qiao, 2018. "Service Agreement Trifecta: Backup Resources, Price and Penalty in the Availability-Aware Cloud," Information Systems Research, INFORMS, vol. 29(4), pages 947-964, December.
    9. Ying-Ju Chen & Ke-Wei Huang, 2016. "Pricing Data Services: Pricing by Minutes, by Gigs, or by Megabytes per Second?," Information Systems Research, INFORMS, vol. 27(3), pages 596-617.

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