Coordination of hybrid cloud computing with contracts

For the hybrid cloud computing market, we examine the critical role of capacity decisions in fulfilling the end-user demand of Software-as-a-Service (SaaS) offerings, where coordination between private and public cloud resources is essential. Analysing centralised and decentralised settings, we show that standard flat-fee public cloud pricing causes double marginalisation and sub-optimal capacity allocation. To resolve this, we evaluate quantity discount and two-part tariff contracts. We establish conditions under which these mechanisms successfully incentivise SaaS providers to align private capacity with the centralised optimum, maximising system profitability. Furthermore, extending our models to endogenous pricing reveals a critical insight: unconditional fixed fees perfectly coordinate the supply chain, whereas usage-conditional fees drive SaaS providers to over-invest in private capacity and artificially inflate retail prices. Our findings provide actionable contract design strategies for cloud vendors to optimise resource allocation and achieve win-win outcomes.