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Coordinating Supply and Demand on an On-Demand Platform: Price, Wage, and Payout Ratio

52 Pages Posted: 30 Aug 2016  

Christopher S. Tang

UCLA Anderson School

Jiaru Bai

University of California, Irvine - Paul Merage School of Business

Kut C. So

University of California, Irvine - Paul Merage School of Business

Xiqun (Michael) Chen

Zhejiang University

Hai Wang

Singapore Management University

Date Written: August 29, 2016

Abstract

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

Tang, Christopher S. and Bai, Jiaru and So, Kut C. and Chen, Xiqun (Michael) and Wang, Hai, Coordinating Supply and Demand on an On-Demand Platform: Price, Wage, and Payout Ratio (August 29, 2016). Available at SSRN: https://ssrn.com/abstract=2831794 or http://dx.doi.org/10.2139/ssrn.2831794

Christopher Tang (Contact Author)

UCLA Anderson School ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

Jiaru Bai

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

Kut So

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

Xiqun Chen

Zhejiang University ( email )

38 Zheda Road
Hangzhou, Zhejiang 310058
China

Hai Wang

Singapore Management University ( email )

School of Information Systems
80 Stamford Road
Singapore 178902, 178899
Singapore

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