Looming market failure in cloud computing: a new institutional economics perspective

Purpose In recent times, high demand for cloud-based services has led to substantial focus in extant literature from technological and business perspectives. However, the prevailing market imperfections have not drawn much interest. This study aims to emphasize on potential sources of market imperfections from new institutional economics (NIE) perspective and attempts to bring forth the importance of public policy in cloud computing ecosystem. Design/methodology/approach This study takes a review-based deductive approach to present a set of propositions which highlight potential causes leading to suboptimal performance of cloud-based services. Findings Lack of clarity around ownership and property rights, high asset specificity, existence of information asymmetry and bounded rationality of the provider and consumer, lead to higher transaction cost for providers and consumers, discouraging participation. This would lead to moral hazard and adverse selection and create market imperfections. Appropriate contractual guidelines, standards, legal framework and policy measures will reduce the risk of such imperfections. Research limitations/implications As the focus of the study is to forward the propositions and not to empirically test them, future researchers can adopt data-driven studies to validate those propositions. Practical implications To ensure equity in the cloud-market, government and industry bodies should work towards enabling both the small and large players to use cloud-based services efficiently and effectively. Appropriate public policy measures can help remove potential market imperfections, encourage better participation and adoption of cloud-based services. Originality/value This study identifies potential market imperfections in cloud computing ecosystem through the lens of the theoretical frameworks of NIE.