Flexible Pricing of Computer Services

Seymour Smidt
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Seymour Smidt: Graduate school of Business and Public Administration, Cornell University

Management Science, 1968, vol. 14, issue 10, B581-B600

Abstract: This article proposes using a flexible price system to allocate computer time and to determine charges for computer users. The proposal is presented in the context of a central university computing center (UCC) although it may be applicable, with some modifications, to a wide range of queueing problems. At present, user-charges in most UCC's are based on average costs with little or no attention to speed of service. This leads to high charges and under-utilization when there is excess capacity, low charges and long queues when capacity is short, and to other problems. Under the proposed fiexible price systems, user-charges are dynamically determined by overall system demand and by user selected turn-around priority. The complexity of the price system can be varied to meet the needs of a particular instillation. The main reason for proposing flexible pricing for computer service is that this approach is consistent with an efficient use of scarce resources, including both the computer and users' time. This conclusion is justified in terms of a formal economic analysis which also serves to clarify the conditions under which revenue from a flexible pricing system would cover the full costs of the computer installation. The pricing of specialized computer hardware and software is also discussed. Finally, consideration is given to possible applications of fiexible pricing to other problems that have traditionidly been discussed in terms of queueing theory.

Date: 1968
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