Price competition with service level guarantee in web services

Web services have become quite popular over the last few years as they allow easier development and integration of business applications. Unlike traditional software systems, web services are self-contained modular software components that are delivered over a network (such as the Internet) and executed on a remote system hosting the requested services. However, the network and processing overhead associated with web services have also presented a significant challenge to its performance. As a result, a web service provider often announces a service-level agreement when launching a service. The service-level agreement provides a guarantee to the consumers that they can get the service they pay for at an assured level of quality. In this paper, we study the competition between two such providers offering functionally the same web services. Each provider needs to decide a service level (standard or premium) she would offer and a corresponding price for the selected service level to meet the QoS guarantee (in terms of an average response time of the service). We first analyze the case where the providers choose service levels and prices simultaneously, and then extend it to a sequential-move situation. Finally, we examine strategic choices of providers when the processing capacity is endogenized into the model.