Gerry Tsoukalas is Associate Professor (with tenure) at Boston University, Questrom School of Business, a Senior Fellow of the Wharton School, University of Pennsylvania, a research fellow of Cornell University’s FinTech Initiative and a Fellow of The Luohan Academy (Alibaba Group).
Abstract: An open debate in platform design is who should control pricing: the platform (centralized pricing), or its service providers (decentralized pricing)? We show the key trade-off is between the regulation of competition and the facilitation of price tailoring. Centralized pricing allows the platform to control the competition that occurs among the agents but struggles with information asymmetry because platforms cannot fully observe agent costs. Decentralized pricing lets agents tailor their prices to their private costs, but without central guidance, due to agent self-interest, competition on the platform can either be too strong (prices are too low) or too weak (prices are too high). For commission-based platforms, either form of price control can prevail depending on market conditions, implying neither dominates. However, a relatively simple tweak to payments -- adopting an affine fee structure based on prices posted or quantities served -- allows the platform to optimally control the market in a fully decentralized manner. In turn, decentralization further supports agent classification as independent contractors, which provides the platform with a potentially valuable strategic option for how to structure their workforce.
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