Incentivation of Service Providers for Efficient Service Composition Agreements

The trend towards dynamic on-demand service provisioning requires the collaboration of a high number of specialized service providers. One challenge of service composition with numerous service providers is the rising uncertainty of service delivery, which depends inter alia on the providers’ effort. Penalties for defecting from agreed service level objectives serve to reduce the uncertainty of service provision and to incentivize providers. In a scenario, where an intermediary coordinates complementary service providers and consumers, we derive the following results: the intermediary should not pursue as high as possible penalties because there are profit-maximizing providers’ effort and penalties which decrease with the number of providers; a particular service provider’s penalty should not depend on this provider’s but on all other service providers’ probabilities of service delivery; the intermediary should react to a cost reduction of one service provider or to an increase of consumer’s valuation by increasing all service providers’ penalties.