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

55 Pages Posted: 8 Nov 2021 Last revised: 17 Nov 2021

See all articles by Gerard P Cachon

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department

Tolga Dizdarer

University of Pennsylvania, The Wharton School, Operations & Information Management Department, Students

Gerry Tsoukalas

University of Pennsylvania - The Wharton School; Boston University; Luohan Academy

Date Written: November 12, 2021

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.

Keywords: blockchain, decentralized pricing, gig economy, platforms, revenue management, smart contracts

JEL Classification: D82, D86, L1, L11, L2, L8, L9, O3, K2

Suggested Citation

Cachon, Gerard P and Dizdarer, Tolga and Tsoukalas, Gerry, Decentralized or Centralized Control of Online Service Platforms: Who Should Set Prices? (November 12, 2021). Available at SSRN: https://ssrn.com/abstract=3957209 or http://dx.doi.org/10.2139/ssrn.3957209

Gerard P Cachon

The Wharton School - Operations, Information and Decisions Department ( email )

Philadelphia, PA 19104
United States

Tolga Dizdarer

University of Pennsylvania, The Wharton School, Operations & Information Management Department, Students ( email )

Philadelphia, PA 19104
United States

Gerry Tsoukalas (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Luohan Academy ( email )

No. 556, Xixi Road, Z Space
Xihu District
Hangzhou, Zhejiang 310013
China

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