Should On-Demand Ride Services Be Regulated? An Analysis of Chinese Government Policies

Abstract

On-demand ride services (e.g., Uber) receive praises from consumers and investors. However, governments in the United States and Europe are challenging these innovative services by raising legal concerns over labor laws, unfair pricing, and consumer safety. At the same time, the Chinese government is facing a dilemma. On one hand, the Chinese government wants to support these innovative startups as examples of its "mass entrepreneurship and innovation" initiative launched in 2015. On the other hand, the Chinese government needs to ensure the survival of the traditional taxi industry that supports millions of taxi drivers. Facing with this dilemma, we develop a two-period dynamic game that captures the strategic interactions of multiple stakeholders (i.e., the government, an on-demand ride service company, independent drivers, taxi drivers, and passengers). Our analysis reveals that, without government regulation, the on-demand ride service platform can drive the traditional taxi industry out of the market. Also, relative to no regulation and complete ban, we show that the Chinese government's new regulatory framework provides a better balance of multiple objectives (e.g., business and job creation, viability of taxi service, consumer welfare, environmental and traffic issues, and labor welfare) across multiple stakeholders. Also, by adopting a unified modeling framework, we find that the government's optimal policy that maximizes the total social welfare depends on the taxi's price and the relative emphasis that the government places on multiple stakeholders. Particularly, our model provides a justification for the Chinese government's new regulations: imposing some basic regulations is a balanced approach to support the new business and to ensure the sustainability of the traditional industry.

Keywords: On-demand ride services, socially responsible operations, innovative business models, public policy, consumer welfare, social welfare

JEL Classification: L52, L98, O38