{"type":"ScholarlyArticle","title":"The Competitive Effects of Variance-based Pricing","authors":[{"name":"Ludwig Dierks","slug":"ludwig-dierks","given":"Ludwig","family":"Dierks","affiliation":"Department of Informatics , University Zurich"},{"name":"Sven Seuken","slug":"sven-seuken","given":"Sven","family":"Seuken","affiliation":"Department of Informatics , University Zurich"}],"abstract":"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.","doi":"10.24963/ijcai.2020/51","url":"https://ijcai.org/proceedings/2020/51","pdf":"https://ijcai.org/proceedings/2020/0051.pdf","markdown":"https://ijcai.org/proceedings/2020/51.md","bibtex":"https://ijcai.org/proceedings/2020/bibtex/51","volume":{"slug":"2020","title":"Proceedings of the Twenty-Ninth International Joint Conference on Artificial Intelligence","short_title":"IJCAI 2020","url":"https://ijcai.org/proceedings/2020/","year":2020,"location":"Yokohama","dates":"January 2021 (postponed from 11-17 July 2020)","editors":"Christian Bessiere","isbn":"978-0-9992411-6-5","publisher":"International Joint Conferences on Artificial Intelligence Organization","doi_prefix":"10.24963/ijcai.2020"},"section":"Agent-based and Multi-agent Systems","track":"Main track","number":51,"pages":{"first":362,"last":370},"keywords":["Agent-based and Multi-agent Systems: Economic Paradigms, Auctions and Market-Based Systems"],"videos":[{"label":"Video","url":"https://videos.ijcai20.org/24894/file_24894.m3u8","length_sec":296,"provider":"hls"}],"references":[{"position":1,"raw":"[Baye and Kovenock, 2017] Michael R. 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