Usage-based versus flat pricing for e-business services with differentiated QoS

Design of competitive e-commerce services, in such a quickly responding market, requires the analyses of prices and price structures. We present a general model of an e-commerce market that allows us to analyze optimal price structures, both flat and usage-based. Based on the price structure of a major Web hosting provider, we consider both single-tier and two-tier (burst-rate) pricing, and our result suggests that the more complex two-tier structure may not be worth the marketing effort, as the firm´s equilibrium profits will not increase through the use of this structure. An essential feature of our approach is that we model explicitly the spread of price-QoS tradeoffs across the end-user population.