Optimal Pricing of Cloud Services: Committed Spend under Demand Uncertainty

Dirk Bergemann and Michael Wang
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Michael Wang: Yale University

No 2424, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We consider a seller who offers services to a buyer with multi unit demand. Prior to the realization of demand, the buyer receives a noisy signal of their future demand, and the seller can design contracts based on the reported value of this signal. Thus, the buyer can contract with the service provider for an unknown level of future consumption, such as in the market for cloud computing resources or software services. We characterize the optimal dynamic contract, extending the classic sequential screening framework to a nonlinear and multi-unit setting. The optimal mechanism gives discounts to buyers who report higher signals, but in exchange they must provide larger fixed payments. We then describe how the optimal mechanism can be implemented by two common forms of contracts observed in practice, the two-part tariff and the committed spend contract. Finally, we use extensions of our base model to shed light on policy-focused questions, such as analyzing how the optimal contract changes when the buyer faces commitment costs, or when there are liquid spot markets.

Pages: 21 pages
Date: 2025-02-11
New Economics Papers: this item is included in nep-com, nep-cta, nep-des, nep-mic and nep-reg
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Working Paper: Optimal Pricing of Cloud Services: Committed Spend under Demand Uncertainty (2025)
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