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

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  • LAM, W.

    (University of Liege)

Abstract

This paper considers firms’ incentives to invest in local and flexible resources when demand is uncertain and correlated. Before demand is realized, two firms invest in their local capacity, and provider(s) of flexible resources invest in their capacity. After demand is realized, firms make their investment decision in flexible resource. I find that market power of the monopolist providing flexible 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 flexible 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.

Suggested Citation

  • Lam, W., 2015. "Competiton in the Market for Flexible Resources: an application to cloud computing," LIDAM Discussion Papers CORE 2015034, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2015034
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2015.html
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    References listed on IDEAS

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    Cited by:

    1. Belleflamme, Paul & Vergote, Wouter, 2016. "Monopoly price discrimination and privacy: The hidden cost of hiding," Economics Letters, Elsevier, vol. 149(C), pages 141-144.
    2. Wolsey, L.A., 2015. "Uncapacitated Lot-Sizing with Stock Upper Bounds, Stock Fixed Costs, Stock Overloads and Backlogging: A Tight Formulation," LIDAM Discussion Papers CORE 2015041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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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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