Decentralized or Centralized Control of Online Service Platforms: Who Should Set Prices?

Abstract

Online service platforms that enable customers to connect with a large population of independent servers have been successfully developed in many sectors, including transportation, lodging, and delivery, among others. We ask a basic, yet fundamentally important, question - who should set the prices on the platform? The platform or the servers? In addition to regulatory implications for the classification of the workers on the platform as either employees or contractors, this choice influences the degree of competition among servers, and in turn determines both the amount of supply available and the overall attractiveness of the platform to consumers. We find that when the platform uses a simple commission contract to earn revenue, the price delegation decision depends on the importance of regulating competition among the large population of servers relative to the value of allowing servers to tailor their prices to their privately known costs. The same tradeoff exists in fully disintermediated platforms, such as those enabled with blockchain technology. However, merely adding appropriate linear quantity discounts or surcharges to the basic commission contract maximizes the platform's revenue and allows all participants to enjoy the benefits of both centralized and decentralized control of prices.