Pricing peer-produced services: Quality, capacity, and competition issues

Peer production has played an important role in the economics of Web 2.0 related services in which user participation and contribution become the main driving dynamics. However, the quality of peer-produced services is uncertain because of inherently decentralized and heterogeneous participants. In the paper, utilizing reliability and game theoretic models, we develop a QoS measure and pricing schemes for this emerging type of service under various market structures. Our results suggest that a monopolistic platform provider has no incentive to offer multiple quality classes of service. Two competing platform providers may offer identical service contracts but still receive non-negative profit. If they offer heterogeneous service contracts, the provider with the lower quality service may provide higher quality than he advertises. This research contributes to the literature with a number of unique and interesting implications for the issues of service contract design, capacity planning, and market interactions for operations of community-based or peer-produced services.