Usage Restriction and Subscription Services: Operational Benefits with Rational Users

Abstract-Cloud resources are usually priced in multiple markets with different service guarantees. For example, Amazon EC2 prices virtual instances under three pricing schemes -the subscription option (a.k.a., Reserved Instances), the pay-as-yougo offer (a.k.a., On-Demand Instances), and an auction-like spot market (a.k.a., Spot Instances) -simultaneously. There arises a new problem of capacity segmentation: how can a provider allocate resources to different categories of pricing schemes, so that the total revenue is maximized? In this paper, we consider an EC2-like pricing scheme with traditional pay-as-you-go pricing augmented by an auction market, where bidders periodically bid for resources and can use the instances for as long as they wish, until the clearing price exceeds their bids. We show that optimal periodic auctions must follow the design of m+1-price auction with seller's reservation price. Theoretical analysis also suggests the connections between periodic auctions and EC2 spot market. Furthermore, we formulate the optimal capacity segmentation strategy as a Markov decision process over some demand prediction window. To mitigate the high computational complexity of the conventional dynamic programming solution, we develop a near-optimal solution that has significantly lower complexity and is shown to asymptotically approach the optimal revenue.

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“…We also note that such exponential resource usage time is widely adopted in economics literatures to analyze rental markets [19], [20].…”

Section: A User Modelmentioning

confidence: 99%

Towards Optimal Capacity Segmentation with Hybrid Cloud Pricing

Wang

Liang

2012

2012 IEEE 32nd International Conference on Distributed Computing Systems

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“…We contribute to this literature by analyzing a firm's new product introduction strategy in the presence of snobbish and forward-looking consumers. Another stream of literature in operations investigates pricing in service systems with congestion (see Hassin and Haviv 2003, Randhawa and Kumar 2008, Anand et al 2011, Cachon and Feldman 2011. The effect of congestion is similar to snobbish consumer behavior in that as more consumers join the system, they derive lower utility.…”

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confidence: 99%

The Limits of Planned Obsolescence for Conspicuous Durable Goods

Agrawal

Kavadias

Toktay

2016

M&SOM

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A n extensive body of literature argues for the benefits of planned obsolescence, the strategy of designing products with low durability to induce repeat purchases from the consumers and allow the firm to sell a larger volume. Yet, several firms avoid planned obsolescence and instead offer products with high durability. In this paper, we offer a demand-side rationale for a high-durability product design strategy: the exclusivityseeking consumer behavior associated with conspicuous consumption. In the presence of consumers who value exclusivity, we find that firms benefit from designing products with higher durability in conjunction with a high-price, low-volume introduction strategy. A higher durability in such a context leads to greater resale value, allowing the firm to charge a higher price and lower the sales volume to achieve the product exclusivity valued by the consumers. This contrasts with the planned obsolescence strategy that capitalizes on the high sales volume achieved by setting a low new product price. We also show that offering higher durability and charging a higher price are complementary levers to respond to consumers who value exclusivity. Our analysis unearths insights regarding the effect of exclusivity-seeking behavior on a firm's demand and pricing. We show that firms' durability choice may explain the joint increase in price and demand for conspicuous goods.

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“…There is a long history of studies on congestion control in service queues in the presence of rational customers. To keep the literature review concise, readers are referred to Hassin and Haviv () for a recent comprehensive review; a few recent examples are Chen and Frank (), Ata and Shneorson (), Randhawa and Kumar (), Bitran et al. (), Cachon and Feldman (), and Li et al.…”

Section: Literature Reviewmentioning

confidence: 99%

Pricing and Operational Performance in Discretionary Services

Tong

Rajagopalan

2014

Production and Operations Management

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In many services, for example, website or landscape design, the value or quality derived by a customer depends upon the service time, and this valuation differs across customers. Customers procure the service based on the expected value to be delivered, prices charged, and the timeliness of service. We investigate the performance of the optimal pricing scheme as well as two commonly used pricing schemes (fixed fee and time‐based pricing) for such services on important dimensions such as revenue, demand served, and utilization. We propose a novel model that captures the above features and wherein both service rate and demand are endogenous and functions of the pricing scheme. In particular, service time is an outcome of the pricing scheme adopted and the heterogeneous valuations of customers, unlike in the queueing‐based pricing literature. We find that the service system may benefit from a greater variance in consumer valuations, and the performance of pricing schemes is impacted by the shape of the distribution of customers' valuation of service time and the responsiveness desired by customers. Both the fixed fee and time‐based schemes do well relative to the optimal pricing scheme in terms of revenue in many plausible scenarios, but there are substantial differences between the pricing schemes in some important operational metrics. For instance, the fixed fee scheme serves more customers and has higher utilization than the time‐based scheme. We also explore variants of the fixed and time‐based schemes that have better revenue performance and show that the two‐part tariff which is a combination of fixed and time‐based pricing can do as well as the optimal scheme in terms of revenue.

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Usage Restriction and Subscription Services: Operational Benefits with Rational Users

Cited by 55 publications

References 12 publications

Towards Optimal Capacity Segmentation with Hybrid Cloud Pricing

Towards Optimal Capacity Segmentation with Hybrid Cloud Pricing

The Limits of Planned Obsolescence for Conspicuous Durable Goods

Pricing and Operational Performance in Discretionary Services

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