Pricing Computer Services Under Alternative Control Structures: Tradeoffs and Trends

Abstract

This paper extends the analysis of the long-run pricing and capacity decision problem for shared computer services by Dewan and Mendelson (1990) and makes two further contributions. First, we show that simple marginal capacity cost pricing is often optimal in the absence of private user information, and it outperforms cost recovery and profit center pricing methods. Second, we provide insights into the implications of declining computing costs on the tradeoff between capacity costs and user time. In equilibrium, expected user delay costs are bounded by capacity costs due to the substitution of cheaper information processing capacity for valuable user time.