I have used 3.5" starter containers in the past, but this year I am going with the little 1" cells and will transplant a couple weeks after they come up. Many simply use solo plastic disposable cups. I would not use the peat pots. If I did, I would remove the pot prior to transplanting. They don't break down fast enough and the plants get root bound before they are able to break through the pots. I don't like the peat pellets for two reasons. First pure peat is not a good medium for peppers. Second, those little things tend to dry out very quickly as they are exposed on all but the bottom. If you are not careful, you could lose your seedlings over night.
I suggest some basic containers that are 3-4" in diameter at the top and fill them with some good starter mix that has perlite and other additives to allow it to drain better. Miracle Grow Seed Starting Mix or another commercially available mix will work. MG Orchid Potting Mix works real well for peppers as it has peat, perlite and pine bark which makes it a good choice.

The potting mix you talk about with the pine bark chunks is commonly called 5-1-1 mix as the basic recipe is 5 parts pine or fir bark fines, 1 part perlite and one part peat or other soil. The pine bark fines need to be as free of "wood pulp" as possible but there will always be some. They also need to be a certain small size usually between 1/8" and 1/2". If you want more info on the pine bark soil mixes, just do a search on the forum for "5-1-1 container mix". You will get dozens of results with literally hundreds of posts on the 5-1-1 mix.
Good luck this year.
Bruce

Thanks Bruce. I appreciate the detailed response. I have several hundred of the 1" 2 x 6 plastic cells I purchased off Amazon. I planned on using them exclusively until I saw Menards with 2.5" and 3.25" peats pots on sale for .50/pack. Since your comments seem to jive with my past thoughts on root penetration with peat pots, I'll avoid them.

I'll do some additional searches on the 5-1-1 mix. Thanks for the heads up on the Orchid mix. I'll probably try that in some trays to see how well it works compared to my eventual concoction.

Bruce is correct. Peat pots will let your seedlings get wet feet, then dry out, and you could lose your whole crop as I did in 2003. You are correct in starting out in the small cell seed starting trays. Sometimes you can get used 3 or 4" plastic pots from a local nursery for potting up. I also use styrofoam cups (punch holes in the bottom). when I run out of the plastic pots.
John A