Coordinating Supply and Demand on an On-Demand Platform: Price, Wage, and Payout Ratio
52 Pages Posted: 30 Aug 2016
Date Written: August 29, 2016
Consider a situation when an on-demand service platform uses earnings-sensitive independent providers with heterogeneous reservation price (for work participation) to serve its wait-time and price sensitive customers with heterogeneous valuation of the service. As such, both the supply and demand are “endogenously” dependent on the price the platform charges its customers and the wage the platform pays its independent providers. In this paper, we present a queueing model with endogenous supply (number of participating agents) and endogenous demand (customer request rate) to model this on-demand service platform. To coordinate endogenous demand with endogenous supply, we use the steady state performance in equilibrium to characterize the optimal price, optimal wage and optimal payout ratio (i.e., the percentage of the platform’s revenue that is paid to the providers) that maximize the profit of the platform (as well as the total welfare). We find that it is optimal for the platform to charge a higher price, pay a higher wage, and offer a higher payout ratio (i.e., the ratio of wage over price) when the potential customer demand increases. Furthermore, when customers become more time-sensitive, the same result holds except that the platform would need to charge a lower price in order to sustain the customer demand.
Keywords: on demand platform, sharing economy
JEL Classification: R41
Suggested Citation: Suggested Citation