  In many markets, like electricity or cloud computing markets, providers incur
large costs for keeping sufficient capacity in reserve to accommodate demand
fluctuations of a mostly fixed user base. These costs are significantly
affected by the unpredictability of the users' demand. Nevertheless, standard
mechanisms charge fixed per-unit prices that do not depend on the variability
of the users' demand. In this paper, we study a variance-based pricing rule in
a two-provider market setting and perform a game-theoretic analysis of the
resulting competitive effects. We show that an innovative provider who employs
variance-based pricing can choose a pricing strategy that guarantees himself a
higher profit than using fixed per-unit prices for any individually rational
response of a provider playing a fixed pricing strategy. We characterize all
equilibria for the setting where both providers employ variance-based pricing
strategies. We find that, while in equilibrium, the profits of the providers
may increase or decrease depending on their cost functions, social welfare
always weakly increases.
