Surge Pricing and Its Spatial Supply Response

92 Pages Posted: 27 Feb 2018 Last revised: 20 May 2019

See all articles by Omar Besbes

Omar Besbes

Columbia Business School - Decision Risk and Operations

Francisco Castro

Columbia Business School - Decision Risk and Operations

Ilan Lobel

New York University (NYU)

Date Written: May 17, 2019

Abstract

We consider the pricing problem faced by a revenue maximizing platform matching price-sensitive customers to flexible supply units within a geographic area. This can be interpreted as the problem faced in the short-term by a ride-hailing platform. We propose a two-dimensional framework in which a platform selects prices for different locations, and drivers respond by choosing where to relocate in equilibrium based on prices, travel costs and driver congestion levels.

The platform's problem is an infinite-dimensional optimization problem with equilibrium constraints. We elucidate structural properties of supply equilibria and the corresponding utilities that emerge and establish a form of spatial decomposition, which allows us to localize the analysis to regions of movement. In turn, uncovering an appropriate knapsack structure to the platform's problem, we establish a crisp local characterization of the optimal prices and the corresponding supply response. In the optimal solution the platform applies different treatments to different locations. In some locations, prices are set so that supply and demand are perfectly matched; over-congestion is induced in other locations, and some less profitable locations are indirectly priced out. To obtain insights on the global structure of an optimal solution, we derive in quasi-closed form the optimal solution for a family of models characterized by a demand shock. The optimal solution, while better balancing supply and demand around the shock, quite interestingly, also ends up inducing movement away from it.

Keywords: Spatial Pricing, Revenue Management, Ride-Hailing, Strategic Supply, Market Design

Suggested Citation

Besbes, Omar and Castro, Francisco and Lobel, Ilan, Surge Pricing and Its Spatial Supply Response (May 17, 2019). Columbia Business School Research Paper No. 18-25. Available at SSRN: https://ssrn.com/abstract=3124571 or http://dx.doi.org/10.2139/ssrn.3124571

Omar Besbes

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

Francisco Castro (Contact Author)

Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States

Ilan Lobel

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

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