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| Type | Conference or Workshop Paper |
| Scope | Discipline-based scholarship |
| Published in Proceedings | Yes |
| Title | The Competitive Effects of Variance-based Pricing |
| Organization Unit | |
| Authors |
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| Presentation Type | paper |
| Item Subtype | Original Work |
| Refereed | Yes |
| Status | Published in final form |
| Language |
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| Page Range | 362 - 370 |
| Event Title | Proceedings of the 29th International Joint Conference on Artificial Intelligence |
| Event Type | conference |
| Event Location | Yokohama, Japan |
| Event Start Date | January 7 - 2021 |
| Event End Date | January 15 - 2021 |
| Place of Publication | Yokohama, Japan |
| Abstract Text | In many markets, like electricity or cloud computing markets, providers incur large costs for keeping sufficient capacity in reserve to accommodate demand fluctuations of a mostly fixed user base. These costs are significantly affected by the unpredictability of the users' demand. Nevertheless, standard mechanisms charge fixed per-unit prices that do not depend on the variability of the users' demand. In this paper, we study a variance-based pricing rule in a two-provider market setting and perform a game-theoretic analysis of the resulting competitive effects. We show that an innovative provider who employs variance-based pricing can choose a pricing strategy that guarantees himself a higher profit than using fixed per-unit prices for any individually rational response of a provider playing a fixed pricing strategy. We then characterize all equilibria for the setting where both providers use variance-based pricing strategies. We show that, in equilibrium, the providers' profits may increase or decrease, depending on their cost functions. However, social welfare always weakly increases. |
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