I've always gravitated towards the ten-tier system that the old guild used to use, even so far as to apply it to setting up my own arenas. And It's never really seemed problematic to me how different a tier 2 vs tier 4 is. Granted I've never seen a battle like that play out, and frankly, I would never enter a battle without my character being equal to or, at worse, one tier under my opponents. Though it does seem that the key to running that system evenly is slotting tiers for each of a character's combat items (IE having strength at Tier 2, Speed at Tier 1, but technology/weapons at Tier 3. I think the guild folks actually took to that for a little while. 

A facet that I've seen that might be of use to establishing where to draw lines with powers is the less-with-more vs. more-with-less. A character, say, with a list of twenty spells, should be somewhat inflexible with what each individual spell can actually accomplish. While their spells might serve a variety of functions, their power would be a bit toned down. On the flip side, a character might be given one or two overarching abilities that can offer higher levels of power. 

As for a PW/Multiverse/Continuum, I've always insisted that recreating and mapping out a world specifically for an arena continuum made things more complicated and difficult to actually maintain. The longest lasting continuum that I've seen was simply established through a collective of battles that were, on the agreement of the players, tied into the histories of their characters. An arena-based PW can be something so simple as saying that Battle B is happening in continuity of Battle A, and so on. Naturally, this system would need its rules established, and for people to manufacture an inciting incident that establishes it. 

We could pretty much establish lore and whatnot as we move along, save for whatever locale/force stands at the center of the PW, whether it be some event or cosmic anomaly that somehow facilitates the converging of characters from multiple universes.