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Competition in the Market for Flexible Resources: an application to cloud computing

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  • Lam, Wing Man Wynne

Abstract

This paper considers firms' incentives to invest in local and exible resources when demand is uncertain and correlated. Before demand is realized, two firms decide to invest in their local capacity. Provider(s) of exible resource observe these decisions and invest in their capacity. After demand is realized, firms buy exible resource if demand exceeds their local capacity. I find that market power of the monopolist providing exible resources distorts investment incentives, while competition mitigates them. The extent of improvement depends critically on demand correlation and the cost of capacity: under social optimum and monopoly, if the exible resource is cheap, the relationship between investment and correlation is positive, and if it is costly, the relationship becomes negative; under duopoly, the relationship is positive. The analysis also sheds light on some policy discussions in markets such as cloud computing.

Suggested Citation

  • Lam, Wing Man Wynne, 2014. "Competition in the Market for Flexible Resources: an application to cloud computing," TSE Working Papers 14-518, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:28399
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    References listed on IDEAS

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    More about this item

    Keywords

    capacity investment; cloud computing; competition; demand correlation;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L8 - Industrial Organization - - Industry Studies: Services

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