We present a decentralized market-based approach to resource allocation in a heterogeneous overlay network. This resource allocation strategy dynamically assigns resources in an overlay network to requests for service based on current system utilization, thus enabling the system to accommodate fluctuating demand for its resources. Our approach is based on a mathematical model of this resource allocation environment that treats the allocation of system resources as a constrained optimization problem. From the solution to the dual of this optimization problem, we derive a simple decentralized algorithm that is extremely efficient. Our results show the near optimality of the proposed approach through extensive simulation of this overlay network environment. The simulation study utilizes components taken from a real-world middleware application environment and clearly demonstrates the practicality of the approach in a realistic setting. © 2010 Elsevier B.V. All rights reserved.