Pricing and commission in two-sided markets with free upgrades

Abstract

We address the problem of optimal pricing in two-sided markets with platforms that facilitate the exchange of services between freelance workers and customers. Often, such platforms offer multiple variants of the same service and in cases when the cheaper service variant witnesses a shortage of supply and the more expensive variant sees a surplus, the platform offers free upgrades to the customers of the cheaper service variant. In this work, we explore the impact of such free upgrades on the platform’s revenue and throughput. In addition, for the setting where the demand and supply are unknown to the platform and the platform has to perform the joint task of supply/demand estimation and pricing, we devise an algorithm based on a strategic division of the search space that enables the platform to efficiently determine throughput and revenue optimal prices. Further, we ascertain the optimal value of the commission retained by the platform per transaction to maximize its revenue.