Optimal contract design for cloud computing service with resource service guarantee

The optimal contract design for cloud computing service with resource guarantee under the consideration of resource redundancy and network externality is studied in this research. A model in which a service provider determines joint pricing and resource allocation decisions is constructed by proposing two types of contracts with different service-level agreements (SLAs). The SLA of each contract describes the price and associated penalty if the provider cannot provide the resource requested by the customers. Optimal pricing and resource allocation decisions as well as the equilibrium contracts of the service provider are analyzed based on the dynamics of the model characteristics. We found that optimal contract design is sensitive to both service levels and customers’ beliefs of compensation ratio when the requested resource is unfulfilled. Furthermore, service providers should evaluate the trade-off between benefit of price discrimination and effect of network externality when determining the optimal contract design.