Competition Between Two-Sided Platforms Under Demand and Supply Congestion Effects

Abstract

Problem definition : This paper explores the impact of competition between platforms in the sharing economy. Examples include the cases of Uber and Lyft in the context of ride-sharing platforms. In particular, we consider competition between two platforms that offer a common service (e.g., rides) through a set of independent service providers (e.g., drivers) to a market of customers. Each platform sets a price that is charged to customers for obtaining the service provided by a driver. A portion of that price is paid to the driver who delivers the service. Both customers’ and drivers’ utilities are sensitive to the payment terms set by the platform and are also sensitive to congestion in the system (given by the relative number of customers and drivers in the market). We consider two possible settings. The first one, termed “single-homing,” assumes that drivers work through a single platform. In the second setting, termed “multihoming” (or “multiapping,” as it is known in practice), drivers deliver their service through both platforms. Academic/practical relevance : This is one of the first papers to study competition and multihoming in the presence of congestion effects typically observed in the sharing economy. We leverage the model to study some practical questions that have received significant press attention (and stirred some controversies) in the ride-sharing industry. The first involves the issue of surge pricing. The second involves the increasingly common practice of drivers choosing to operate on multiple platforms (multihoming). Methodology : We formulate our problem as a pricing game between two platforms and employ the concept of a Nash equilibrium to analyze equilibrium outcomes in various settings. Results : In both the single-homing and multihoming settings, we study the equilibrium prices that emerge from the competitive interaction between the platforms and explore the supply and demand outcomes that can arise at equilibrium. We build on these equilibrium results to study the impact of surge pricing in response to a surge in demand and to examine the incentives at play when drivers engage in multihoming. Managerial implications : We find that raising prices in response to a surge in demand makes drivers and customers better off than if platforms were constrained to charge the same prices that would arise under normal demand levels. We also compare drivers’ and customers’ performance when all drivers either single-home or multihome. We find that although individual drivers may have an incentive to multihome, all players are worse off when all drivers multihome. We conclude by proposing an incentive mechanism to discourage multihoming.