Market Formation, Pricing, and Value Generation in Ride-Hailing Services

Abstract

<p>Problem definition: We empirically study the market for ride-hailing services. In particular, we</p><p>explore the following questions: (i) How do the two-sided market and prices jointly form in ride-hailing</p><p>marketplaces? (ii) Does surge pricing create value and for whom? How can its efficiency be improved?</p><p>(iii) Can platforms’ strategy on revenue sharing with drivers be improved? (iv) What is the value</p><p>generated by ride-hailing services, including hosting rival taxi services on ride-hailing apps?</p><p>Methodology/Results: We develop a discrete choice model for the formation of mutually dependent</p><p>demand (customer side) and supply (driver side) that jointly determine pricing. Using this model and a</p><p>comprehensive data set obtained from the largest mobile ride platform in China, we estimate customer</p><p>and driver price elasticities and other factors that affect market participation for the company’s two</p><p>main markets, namely basic ride-hailing and Taxi services. Based on these estimation results and</p><p>counterfactual analysis, we demonstrate that surge pricing improves customer and driver welfare as well</p><p>as platform revenues, while counterintuitively reducing Taxi revenues on the platform. However, surge</p><p>pricing should be avoided during non-peak hours as it can hurt both customer and platform surplus. We</p><p>show that platform revenues can be improved by increasing drivers’ revenue share from the current levels.</p><p>Finally, we estimate that the platform’s basic ride-hailing services generated customer value equivalent</p><p>to 13.25 Billion USD in China in 2024, and hosting rival Taxi services on the platform boosted customer</p><p>surplus by 3.6 Billion USD.</p><p>Managerial Implications: Our empirical framework provides ride-hailing companies a way to estimate</p><p>demand and supply functions, which can help with optimization of multiple aspects of their operations.</p><p>Our findings demonstrate how to use surge pricing and revenue sharing more effectively. Finally, our</p><p>results measure and provide insights into policy questions such as restricting ride-hailing and mandating</p><p>the inclusion of rival Taxi services in platforms.</p>