Optimal internal pricing and backup capacity of computer systems subject to breakdowns

In a recent survey computers were found to break down nine times per year in the average company and computer downtime cost US business $4 billion in 1991. The existing literature that combines pricing and queuing analysis of a shared service facility does not explicitly consider the failures of computer systems. The objective of this paper is to examine the impact of computer breakdowns on various aspects of the pricing and capacity decisions. It also examines the issue whether to acquire backup capacity when the computer system is in repair. The results of this paper show that computer breakdowns have significant impact on various aspects of concern. In general, computer breakdowns increase the expected time of jobs in the system, thus discouraging the submission of low-value jobs. Less computer capacity is needed to service the jobs with higher values compared to the case where a computer works all the time. The utilization ratio is lower in view of computer breakdowns. The firm, faced with computer breakdowns, has to increase the price of computer service and the increase in price is significant. Secondly, the findings suggest that it is imperative to acquire backup capacity when computing is critical to the firm in terms of high delay cost of jobs. The research results support the ‘hot backup’ strategy, a common industry practice to operate in parallel two computers with the same capacity. Finally, the firm should charge users the total marginal capacity costs of the firm's computer as well as the backup.