We examine the economics of demand and supply in cloud computing. The public cloud offers three main benefits to firms: 1) utilization can be scaled up or down easily; 2) capital expenditure (on-premises servers) can be converted to operating expenses, with the capital incurred by a specialist; 3) software can be ``pay-as-you-go.'' These benefits increase with the firm's ability to dynamically scale resource utilization and thus point to the need for dynamic prices to shape demand to the (short-run) fixed datacenter supply. Detailed utilization analysis reveals the large swings in utilization at the hourly, daily or weekly level are very rare at the customer level and non-existent at the datacenter level. Furthermore, few customers show volatility patterns that are excessively correlated with the market. These results explain why fixed prices currently prevail despite the seeming need for time-varying dynamics. Examining the actual CPU utilization provides a lens into the future. Here utilization varies by order half the datacenter capacity, but most firms are not dynamically scaling their assigned resources at-present to take advantage of these changes. If these gains are realized, demand fluctuations would be on par with the three classic industries where dynamic pricing is important (hotels, electricity, airlines) and dynamic prices would be essential for efficiency.

The public cloud "infrastructure as a service" market possesses unique features that make it difficult to predict long-run economic behavior. On the one hand, major providers buy their hardware from the same manufacturers, operate in similar locations and offer a similar menu of products. On the other hand, the competitors use different proprietary "fabric" to manage virtualization, resource allocation and data transfer. The menus offered by each provider involve a discrete number of choices (virtual machine sizes) and allow providers to locate in different parts of the price-quality space. We document this differentiation empirically by running benchmarking tests. This allows us to calibrate a model of firm technology. Firm technology is an input into our theoretical model of price-quality competition. The monopoly case highlights the importance of competition in blocking "bad equilibrium" where performance is intentionally slowed down or options are unduly limited. In duopoly, price competition is fierce, but prices do not converge to the same level because of price-quality differentiation. The model helps explain market trends, such the healthy operating profit margin recently reported by Amazon Web Services. Our empirically calibrated model helps not only explain price cutting behavior but also how providers can manage a profit despite predictions that the market "should be" totally commoditized.