Research Note - Cloud Computing Spot Pricing Dynamics: Latency and Limits to Arbitrage

This paper examines the influence of latency on cloud computing pricing dynamics. Using Amazon EC2 east and west market spot instance pricing and latency intra-day data from April 9, 2010 to May 22, 2011, we find considerable time variation in spot instance prices and prices are often persistently greater in the west. Bivariate Vector Autoregressive model results show that within-market autoregressive pricing effects are larger than acrossmarket effects. We document that a large portion of the relative price discovery (over 70%) occurs in the east market. Our regression results further show that east-west latency differentials have a significantly positive effect on east-west pricing differentials. Latency creates a dynamic pricing wedge that widens or narrows conditional on the latency differentials. Using an Error Correction model, the speed of adjustment from long-run pricing convergence errors causes the short-run price differential to narrow, but the adjustment is only partial.