Managing Market Mechanism Transitions : A Randomized Trial of Decentralized Pricing versus Platform Control

Platforms represent a new middle ground between hierarchies and marketplaces, balancing delegation to providers with centralized control of key strategic dimensions like pricing and customer service. Market design choices are often made early in the life of a platform, thus executives must regularly re-optimize while managing change. We report on a two-year study conducted during and after such a transition at a leading US peer-to-peer car rental platform where, in advance of an initiative to centralize pricing, providers were randomly assigned over a period of two months to groups with varying levels of pricing control. Our experimental results show that even when faced with the prospect of significantly higher revenues, sharing economy providers retaliate against the centralization of pricing through three distinct channels: (i) exiting the platform, (ii) reducing asset availability, and (iii) cancelling transactions. We also show that allowing providers to retain partial control can lead to substantial reductions in each of forms of retaliation, even when the decentralization lowers revenue and when providers do not actually utilize the pricing control they are given. We discuss evidence that supports two alternative explanations for our results: that centrally optimized market mechanisms may ignore transaction costs that providers are better informed about, and that providers react more negatively to changes that are perceived as violating their implicit psychological contract with the platform. Our findings provide insight into managing change and balancing market-like and hierarchical design features on digital platforms, shedding new light on the tradeoffs between delegation and control in these emerging hybrid economic institutions