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Game Theory in the Oligopoly of Cloud Computing

The emergence of cloud computing in the modern age of technological development has created an interesting oligopoly. Cloud Computing is the practice of using servers hosted over the internet to store high volume data rather than storing it on physical computers within a company. The price fluctuations in this industry can be modeled with game theory to figure out how certain companies will react to their competitors’ price changes. Currently the Cloud computing Marketplace is dominated by four major companies, which are Amazon, IBM, Windows and Google. These companies have the resources to provide the resources such as 27 x 7 customer support and onsite technical support, this has essentially lead them to form the oligopoly in this field. Each company posts their prices based on their top competitor’s rates. The most beneficial situation for any of these top vendors will arise when their prices are lower than their competitors, which means that they will get more customers and get more profit in contrast to their competitors. So, in reaction to one company lowering their prices everyone must follow with lowering their prices, otherwise the risk losing a majority of the customer base. And if this trend continues (i.e. one company keeps lowering their prices) then other companies should keep lowering their prices so that they can essentially split the profit from the customers at the bare minimum profit price point.

Looking at the opposite situation raises and interesting predicament. When one company raises their prices, it would seem beneficial for their competitors to keep their prices at the same point (in which case the remaining companies can increase their customer base) but this is not the most beneficial situation in most cases. Instead of all the companies keeping their prices the same point, the profitable situation in this case would be for all the companies to raise their prices to match highest one, in which case they can all make higher profit rates from their customer base. Even though collusion is illegal in most countries, it is not illegal for companies to increase their price based on one companies increase in prices. In this case all the companies in the oligopoly make more profit without necessarily increasing their customer base. Since all the companies are essentially providing the same service they often try to differentiate themselves by strong outreaches and advertisements. However, it is unclear how all advertising campaigns influence increase costumer flow compared to lower prices. Yet if one company is pushing a strong advertising campaign all the other companies should also push a strong campaign.


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September 2017