Innovative Applications of O.R. Pricing peer-produced services: Quality, capacity, and competition issues Yung-Ming Li * , Yi-Lin Lee Institute of Information Management, National Chiao Tung University, Hsinchu 300, Taiwan article info Article history: Received 6 December 2008 Accepted 16 June 2010 Available online 22 June 2010 Keywords: Game theory Pricing Web 2.0 Peer production Service quality Competition abstract 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-pro- duced 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 hetero- geneous 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 implica- tions for the issues of service contract design, capacity planning, and market interactions for operations of community-based or peer-produced services. Ó 2010 Elsevier B.V. All rights reserved. 1. Introduction In the wave of Web 2.0, the power of online community is ad- dressed and peer production is emerging as a major economic force impacting various industries. Online communities are gaining momentum on the web and are reshaping the way how informa- tion is consumed and produced (Kolbitsch and Maurer, 2006). Companies and consumers had different roles of production and consumption in the traditional value creation process, but peer production creates a new dynamic to the producer/customer rela- tionship. Many initiatives have been launched to deal with this changing world and some have been successful, but it is still pretty new to most companies. Different terms can be found to denote the growing new phenomenon such as peer production (Benkler, 2002; Benkler and Nissenbaum, 2006) and user generated content (Oded, 2007), hereinafter we refer these production types as peer production, and the platforms/systems which support peer-produc- tion processes are named as peer-produced services. There exist many popular realized peer production based services, for exam- ple, information services like Experts-Exchange and Yahoo! An- swers. However, it is still an evolving concept, and there is no single dominate business model at present. We observed that some companies provided similar service, but after years only a few still there. Booming Web 2.0 services are facing challenges to monetize the success (Höegg et al., 2006), and so are peer-produced ser- vices. The business models of Web 2.0 related services are becom- ing increasingly promising. Since peer production is one of the main distinguishing characteristics of Web 2.0 service, it is desir- able to analyze and extend the knowledge of the peer production based service market. Due to the decentralized and loosely self- enforced contribution, the quality of peer-produced services is uncertain. In contrast with traditional firm-produced products, the quality of peer-produced services is associated with the con- tribution rate of heterogeneous participants, the number of par- ticipants, and the capacity-limited platform (Agichtein et al., 2008). Product or service differentiation is a common marketing technique exploited for profit improvement. As any pricing schemes should be realized based on the classes of service qual- ity, it is important to develop an appropriate model to evaluate the quality of service (QoS) deliverable to the users before they can subscribe to the services. In this paper, we propose a general framework for investigating the pricing and quality strategies of peer-produced content ser- vices based on the framework of service-level agreement (SLA) un- der various market structure settings, but do not limit it to specific business applications. To generalize our research, the services which share the following characteristics are defined as peer-pro- duced services. First, there is a platform which enables users to contribute. Second, the contents within a platform are contributed (produced) and requested (consumed) by the platform users. Third, the users are autonomous and individual contribution is stochastic. Due to the decentralized and self-motivated nature, the quality of peer-production-related service is hard to evaluate. A simple yet feasible way is proposed to measure the quality of peer-produced services, and develop optimal service quality levels, pricing 0377-2217/$ - see front matter Ó 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ejor.2010.06.023 * Corresponding author. Tel.: +886 3 5712121x57414. E-mail addresses: yml@mail.nctu.edu.tw (Y.-M. Li), marinerlee@gmail.com (Y.-L. Lee). European Journal of Operational Research 207 (2010) 1658–1668 Contents lists available at ScienceDirect European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor