Blizzard: PvP will use Elo System for Matchmaking

Blizzard Blue Tracker: July 9, 2012.

More specifically, based off of your win/loss record. It's not dissimilar from the matchmaker found in StarCraft II, which is based off of the Elo system used for Chess championships. Your win/loss and who they were against determines a 'skill rating', which is used to match up against other players of a similar rating. The intent is to get an even/fair match. Regardless of any individual factors like build, gear, or player ability, you'll find some equilibrium where you're facing off against players that you're about as likely to beat as you are to lose. If getting better gear raises your abilities then you're simply matched against players of a higher rating. Changing builds or just getting better at PvP could have the same effect. But regardless if you move up or down you're ultimately still netting around a 50/50 win/loss as you're always matching against similarly rated players.