Centralized versus Decentralized Pricing Controls for Dynamic Matching Platforms

Amid intensifying regulatory and public scrutiny of the control exerted by digital platforms, the paper presented in this Virtual Market Design Seminar investigates how delegating pricing power from the platform to suppliers—“decentralized pricing”—affects matching efficiency and social welfare in two-sided markets. In the benchmark centralized setting, the platform dictates the market price to maximize a chosen objective. In contrast, under full decentralization, each supplier chooses a price as a function of their private cost, and customers accept or reject matches based on their private valuations. Using a fluid model of dynamic two-sided matching with strategic customers and suppliers, the authors uncover structural properties of the stationary market equilibria. These properties allow them to characterize the unique equilibrium under centralized and decentralized pricing. The authors find that decentralized pricing typically reduces social welfare compared to welfare-maximizing centralized price control, mainly due to supply-demand imbalances, and may even leave suppliers worse off despite having more pricing power. However, decentralization may improve welfare against centralized platforms that prioritize revenue. Decentralized inefficiencies can also be mitigated by regulating market frictions (such as waiting costs and abandonment) through operational levers, thereby recovering first-best outcomes in some cases. Regulators and suppliers pushing for pricing autonomy should therefore be mindful of such imbalances to avoid unintended consequences. Despite relinquishing price controls, platforms have alternative levers—such as utilization-based minimum earnings guarantees in ride-hailing, demand-shaping incentives (e.g., “wait-and-save” delivery rebates), and bonuses that discourage multi-homing—to rebalance supply and demand, and nudge decentralized markets toward efficiency.