Price, Wage, and Fixed Commission in On-Demand Matching

Abstract

Motivated by the emerging sharing economy, we study an on-demand matching platform that crowdsources a service from independent suppliers and sells it to customers. The platform offers a wage to the supply side and charges a price to the demand side. We consider a set of market conditions, under each of which the volume of participating demand and supply depends on the price and the wage. We study the performance of the widely practiced, flat, across-the-board commission contracts, under which the platform takes a fixed cut, and thus the wage is equal to a fraction of the price, regardless of what price is charged. We examine the effect of the elasticities of demand and supply on the performance of the fixed commission contract and provide a lower bound on its performance as a function of those elasticities. Our theoretical bounds also allow us to assess the worst-case performance of the fixed commission contract based on the empirical findings in the economic literature on demand and supply elasticities for ride-hailing services.

Keywords: Sharing economy, Two-sided pricing, Supply contract, Performance bound, On-demand matching, Crowdsourcing, Surge pricing, Uber

JEL Classification: D4, D51, D86, E24, J3, J41, L11, L81, L87, L91, R4