Service Guarantee Decision of Online Service Providers and Market Implications

ABSTRACT Online services face quality uncertainties. To address user concerns, Online Service Providers (OSPs) sometimes provide service guarantees, compensating users if quality falls below a predefined threshold. This paper analyzes how OSPs use service guarantees to navigate market competition and enhance revenue through game theory and queuing theory models. Key findings include the following: offering guarantees enable OSPs to increase prices; in monopolistic markets, guarantees are offered only if the service guarantee strength is sufficient, whereas in competitive markets, decisions depend on relative strengths and competitor actions. Surprisingly, slower response times under service guarantees can boost profits, especially when resource costs are high.