When Should Prices Stay Fixed? On the Chances and Limitations of Spot Pricing in Larger Markets

Abstract

Selling resources via auctions often seems profit-optimal in theory. Yet in practice, providers most often choose to sell homogeneous resources such as cloud computing instances at fixed prices. While it has been argued that this is explained by relatively non-volatile demand distributions and highly competitive market environments, these arguments only paint a partial picture. Through a formal game theoretic analysis, we show that the relative profit increase of offering resources through a spot pricing mechanism instead of at a fixed price is unbounded as long as a sufficiently competitive outside option exists, even if demand is very non-volatile. To explain the lack of spot pricing in practice, we consider that users might be biased against more complex auction-based mechanisms. We find that in large, non-volatile markets even a very small user bias will turn fixed-pricing profit-optimal if demand is sufficiently large and non-volatile. We derive a sufficient condition under which fixed prices are profit-optimal and illustrate the observed effects through a numerical example.