Can Two Competing On-Demand Service Platforms be Profitable?

Abstract

Problem Definition: Can two competing on-demand service platforms be profitable in equilibrium? The question is well-studied for firms competing purely on price in a single-sided market, but it is not well-understood for on-demand service platforms competing on price and wage in a “two-sided” market.

Academic/Practical Relevance: As entrepreneurs develop and as venture capital firms finance various on-demand service platforms, it is important for them to examine whether multiple competing platforms can co-exist profitably.

Methodology: In this paper, we analyze the equilibrium structure by solving different variants of a 2-stage non-cooperative game in which both platforms use lower prices and waiting time to compete for more customers and higher wages and utilization to entice more providers to participate.

Results: We first examine a base case when both firms operate under seven operational assumptions: 1) Non-exclusive providers; 2) Non-exclusive customers; 3) Pure pricing strategies; 4) Constant pricing; 5) Homogeneous services; 6) Homogeneous providers; and 7) Homogeneous customers. We find that only one platform can sustain in a payoff dominant stable equilibrium. We examine whether this “winner-take-all” equilibrium would persist when those operational environmental assumptions are relaxed separately. Our analysis reveals that the “winner-take-all” phenomenon continues to persist under promotional pricing strategies, service differentiation, and heterogeneous service providers. However, both platforms can sustain profitably when each platform engages providers (or customers) exclusively, when platforms adopt time-based pricing strategies, or when customers are heterogeneous.

Managerial Implications: Our results offer insights into different operating environments under which both platforms can both sustain profitably in equilibrium.

Keywords: On-Demand Economy, Non-cooperative Game, Increasing Return, Network Externality, Two-sided Markets, Platform Competition