Strategic Pricing of Horizontally Differentiated Services with Switching Costs: A Pricing Model for Cloud Computing

Abstract

ABSTRACTThe pricing of cloud computing services is a major challenge because the industry is in its infancy and firms employ pricing models developed for conventional electronic commerce. In this study, we offer a new approach to cloud services pricing that considers customer behavior. First, we propose a base model centered around a profit-maximizing duopolistic market serving both rational and time-inconsistent customers. Our results reveal that firms can profit from impatient customers. In addition, we extend the base model with the effect of delayed network externalities because typically information goods strongly exhibit this property. For the latter case, we show that the effect of network externalities reduces the impact of low switching costs and firms benefit from time-inconsistent behavior. This study contributes to theories of pricing information goods. Furthermore, practitioners who make pricing decisions for cloud computing services can benefit from our findings.