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Use Future Markets of the Nonstorable Commodity

IT resources are generally not storable, in the sense that capacity not used today cannot be put aside for future use. Since the resources cannot be stored, there need be no link between the price for a resource now and the price that the resource (if available) will fetch at any future time (even in 1 second!). Given that it is impossible to build up inventories to smooth out the differences between supply and demand, prices can be arbitrarily volatile (this has been observed in practice for other nonstorable commodities. To avoid this price volatility and o enable planning and risk management, conventional nonstorable commodities have developed futures markets, that is, markets for reservations.

The most significant non-IT commodity that is also nonstorable is electrical power (with the notable exceptions of hydroelectric and pumped storage). In electricity markets, as in several others for nonstorables (e.g., live cattle, interest rates), contracts for future delivery (forward or futures contracts) are the most used and have much higher trading volumes than than those for immediate delivery (spot contracts). The notable electricity market failure in California was directly tied to poor use of forward contracts. The experience of electricity markets is clear and has led to their redesign with the aim to move everything possible off the spot market and onto the futures markets.

IT resources -- like any other resource -- have dynamically changing value. Given that they are not storable, availability cannot be guaranteed without a formal mechanism, that is, reservations. This availability guarantee acts as a substitute for inventories and helps to prevent unwanted excessive value fluctuations.


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