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Research Note—Cloud Computing Spot Pricing Dynamics: Latency and Limits to Arbitrage

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  • Hsing Kenneth Cheng

    (Hough Graduate School of Business, Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

  • Zhi Li

    (Technology, Operation and Information Management Division, Babson College, Babson Park, Massachusetts 02457)

  • Andy Naranjo

    (Hough Graduate School of Business, Warrington College of Business Administration, University of Florida, Gainesville, Florida 32611)

Abstract

This study examines cloud computing spot pricing dynamics and the influence of latency on those pricing dynamics. Using the Amazon Elastic Compute Cloud U.S. East and West market spot instance pricing and latency intraday data from April 9, 2010, to May 22, 2011, we find considerable time variation in spot instance prices, and prices are often persistently higher in the West. Bivariate vector autoregressive model results show that within-market autoregressive pricing effects are larger than across-market effects. We also document that over 70% of the relative price discovery occurs in the East market. Our regression results further show that East–West latency differentials have a significantly positive effect on East–West pricing differentials. Latency creates a dynamic pricing wedge that widens or narrows conditional on the latency differentials. Using an error correction model, the speed of adjustment from long-run pricing convergence errors causes the short-run price differential to narrow, but the adjustment does not completely offset the price differential.

Suggested Citation

  • 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.
    • Handle: RePEc:inm:orisre:v:27:y:2016:i:1:p:145-165
    DOI: 10.1287/isre.2015.0608
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    References listed on IDEAS

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    Cited by:

    1. Leila Hosseini & Shaojie Tang & Vijay Mookerjee & Chelliah Sriskandarajah, 2020. "A Switch in Time Saves the Dime: A Model to Reduce Rental Cost in Cloud Computing," Information Systems Research, INFORMS, vol. 31(3), pages 753-775, September.
    2. Dirk Schneckenberg & Jose Benitez & Christoph Klos & Vivek Velamuri & Patrick Spieth, 2021. "Value creation and appropriation of software vendors: A digital innovation model for cloud computing," Post-Print hal-03329065, HAL.
    3. Doan, Xuan Vinh & Lei, Xiao & Shen, Siqian, 2020. "Pricing of reusable resources under ambiguous distributions of demand and service time with emerging applications," European Journal of Operational Research, Elsevier, vol. 282(1), pages 235-251.

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