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

Design of e-commerce services that are competitive, 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.