More than Taxis with An App: How Ride-hailing Platforms Promote Market Efficiency

49 Pages Posted: 7 Jul 2017 Last revised: 23 Jun 2018

Chungsang Lam

Clemson University - John E. Walker Department of Economics

Meng Liu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Washington University in St. Louis

Date Written: May 1, 2018

Abstract

How is economic value created by on-demand ride-hailing platforms (RHPs)? We exploit real-time data on dynamic pricing and wait time of Uber and Lyft, combined with taxi, Uber, and Lyft trip records in New York City. We estimate a route-time-specific consumer discrete-choice demand for rides that allows substitution among transportation modes. Preference estimates confirm that price-sensitive consumers value their time and dislike waiting, which creates scope for RHPs, as they allow favorable trade-offs between price and wait time. Counterfactual analyses highlight two main findings. First, RHP riders gain 72 cents per dollar spent on these platforms, where over half of the efficiency gain is accounted for by reduced wait time. Second, dynamic pricing is the driving force of RHPs in thick markets such as Manhattan and rush hours, while the tech-aided matching contributes most in thin markets such as outer boroughs. These mechanisms and associated efficiency gains suggest that RHPs have different production functions from taxis, and this finding has important policy and managerial implications.

Keywords: Ride-hailing Platforms, Sharing Economy, Dynamic Pricing, Market Efficiency

JEL Classification: L10, L91, D40, D60, O33

Suggested Citation

Lam, Chungsang and Liu, Meng, More than Taxis with An App: How Ride-hailing Platforms Promote Market Efficiency (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=2997190 or http://dx.doi.org/10.2139/ssrn.2997190

Chungsang Lam

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

Meng Liu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Cambridge, MA 02139
United States

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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