Should You Kill or Embrace Your Competitor: Cloud Service and Competition Strategy

Cloud services have grown rapidly in recent years as a new form of service, but there exists scant research on the competition and service offering strategies of cloud service providers. We study these strategic choices by considering a setting where an incumbent cloud service provider may offer two service classes (premium and standard) and an entrant provider may offer the standard service. We analyze two competitive strategies the incumbent provider: (a) deterring competitor entry, and (b) not deterring competitor entry. We also evaluate two service offering strategies of the incumbent provider: (a) offering both the premium and the standard service, and (b) offering the premium service only. Based on the results of our model, we present several useful managerial insights. First of all, we find that, under monopoly setting, it may sometimes be beneficial for the service provider to encourage higher usage despite the extra cost. Further, in the duopoly setting, higher customer usage impacts the Deter/Allow strategy choice and is neither always beneficial nor always detrimental to the incumbent provider, and such impact depends on profit margin and customer usage distribution. We also find that a larger market encourages the incumbent provider to add the standard service and switch between Allow and Deter strategies, since a larger market size may reduce the profit of an incumbent provider sticking to the Deter strategy. On the capacity side, we discover that the incumbent provider should strive to deter entry threats when it is at a cost advantage in a small market.