Essays on Cloud Pricing and Causal Inference
Creators: Kilcioglu, Cinar
Publisher: name: Columbia University
Year: 2016
Subjects: Data processing service centers--Energy conservation
Cloud computing
Industrial management
Industrial engineering
Operations research

description: In this thesis, we study economics and operations of cloud computing, and we propose new matching methods in observational studies that enable us to estimate the effect of green building practices on market rents. 
      In the first part, we study a stylized revenue maximization problem for a provider of cloud computing services, where the service provider (SP) operates an infinite capacity system in a market with heterogeneous customers with respect to their valuation and congestion sensitivity. The SP offers two service options: one with guaranteed service availability, and one where users bid for resource availability and only the "winning" bids at any point in time get access to the service. We show that even though capacity is unlimited, in several settings, depending on the relation between valuation and congestion sensitivity, the revenue maximizing service provider will choose to make the spot service option stochastically unavailable. This form of intentional service degradation is optimal in settings where user valuation per unit time  increases sub-linearly with respect to their congestion sensitivity (i.e., their disutility per unit time when the service is unavailable) -- this is a form of "damaged goods." We provide some data evidence based on the analysis of price traces from the biggest cloud service provider, Amazon Web Services.
      In the second part, we study the competition on price and quality in cloud computing. The public "infrastructure as a service" cloud market possesses unique features that make it difficult to predict long-run economic behavior. On the one hand, major providers buy their hardware from the same manufacturers, operate in similar locations and offer a similar menu of products. On the other hand, the competitors use different proprietary "fabric" to manage virtualization, resource allocation and data transfer. The menus offered by each provider involve a discrete number of choices (virtual machine sizes) and allow providers to locate in different parts of the price-quality space. We document this differentiation empirically by running benchmarking tests. This allows us to calibrate a model of firm technology. Firm technology is an input into our theoretical model of price-quality competition. The monopoly case highlights the importance of competition in blocking "bad equilibrium" where performance is intentionally slowed down or options are unduly limited. In duopoly, price competition is fierce, but prices do not converge to the same level because of price-quality differentiation. The model helps explain market trends, such the healthy operating profit margin recently reported by Amazon Web Services. Our empirically calibrated model helps not only explain price cutting behavior but also how providers can manage a  profit despite predictions that the market "should be" totally commoditized.
      The backbone of cloud computing is datacenters, whose energy consumption is enormous. In the past years, there has been an extensive effort on making the datacenters more energy efficient. Similarly, buildings are in the process going "green" as they have a major impact on the environment through excessive use of resources. In the last part of this thesis, we revisit a previous study about the economics of environmentally sustainable buildings and estimate the effect of green building practices on market rents. For this, we use new matching methods that take advantage of the clustered structure of the buildings data. We propose a general framework for matching in observational studies and specific matching methods within this framework that simultaneously achieve three goals: (i) maximize the information content of a matched sample (and, in some cases, also minimize the variance of a difference-in-means effect estimator); (ii) form the matches using a flexible matching structure (such as a one-to-many/many-to-one structure); and (iii) directly attain covariate balance as specified ---before matching--- by the investigator. To our knowledge, existing matching methods are only able to achieve, at most, two of these goals simultaneously. Also, unlike most matching methods, the proposed methods do not require estimation of the propensity score or other dimensionality reduction techniques, although with the proposed methods these can be used as additional balancing covariates in the context of (iii). Using these matching methods, we find that green buildings have 3.3% higher rental rates per square foot than otherwise similar buildings without green ratings ---a moderately larger effect than the one previously found.