Matching in Ride Hailing: Wild Goose Chases and How to Solve Them

Abstract

We show that ride-hailing markets are prone to a matching failure ("wild goose chases") in which high demand sets off a harmful feedback cycle of few idle drivers, high pickup times, and low earnings, drastically reducing welfare. After characterizing these failures theoretically and showing empirical evidence of their relevance, we analyze how platforms can avoid them. Raising prices brings demand back under control. Platforms can thus set a uniform high price, or they can use high "surge" pricing during high demand times while keeping prices low at other times. Some adjustments to the matching algorithm can also avoid the problem, but surge pricing Pareto dominates them in our empirical setting.

Keywords: Ride Hailing, Market Design, Matching, First Dispatch, Surge Pricing

JEL Classification: D47, L91, R41