Competition Between Two-Sided Platforms Under Demand and Supply Congestion Effects

50 Pages Posted: 8 Oct 2018

See all articles by Fernando Bernstein

Fernando Bernstein

Duke University

Gregory DeCroix

University of Wisconsin - Madison - School of Business

N. Bora Keskin

Duke University - Fuqua School of Business

Date Written: September 13, 2018

Abstract

Problem definition: This paper explores the impact of competition between platforms in the sharing economy. Examples include the cases of Uber and Lyft in the context of ride-sharing platforms. In particular, we consider competition between two platforms that offer a common service (e.g., rides) through a set of independent service providers (e.g., drivers) to a market of customers. Each platform sets a price that is charged to customers for obtaining service provided by a driver. A portion of that price is paid to the driver that delivers the service. Both customers’ and drivers’ utilities are sensitive to the payment terms set by the platform and are also sensitive to congestion in the system (given by the relative number of customers and drivers in the market). We consider two possible settings. The first one, termed “single-homing,” assumes that drivers work through a single platform. In the second setting, termed “multi-homing” (or “multi-apping” as it is known in practice), drivers deliver service through both platforms.

Academic/Practical Relevance: This is one of the first papers to study competition and multi-homing in the presence of congestion effects typically observed in the sharing economy. We leverage the model to study some practical questions that have received significant press attention (and stirred some controversies) in the ride-sharing industry. The first involves the issue of surge pricing. The second involves the increasingly common practice of drivers choosing to operate on multiple platforms (multi-homing). Methodology: We formulate our problem as a pricing game between two platforms and employ the concept of Nash equilibrium to analyze equilibrium outcomes in various different settings. Results: In both the single-homing and multi-homing settings, we study the equilibrium prices that emerge from the competitive interaction between the platforms and explore the supply and demand outcomes that can arise at equilibrium. We build on these equilibrium results to study the impact of surge pricing in response to a surge in demand and to examine the incentives at play when drivers engage in multi-homing. Managerial Implications: We find that raising prices in response to a surge in demand makes platforms, drivers and customers better off than if platforms were constrained to charge the same prices that would arise under normal demand levels. We also compare the platforms’, drivers’, and customers’ performance when all drivers either single- home or all multi-home. We find that, while individual drivers may have an incentive to multi-home, all players are worse off when all drivers multi-home.

Keywords: Sharing Economy, Two-Sided Platforms, Competition, Congestion Effects, Ride-Sharing

Suggested Citation

Bernstein, Fernando and DeCroix, Gregory and Keskin, N. Bora, Competition Between Two-Sided Platforms Under Demand and Supply Congestion Effects (September 13, 2018). Available at SSRN: https://ssrn.com/abstract=3250224 or http://dx.doi.org/10.2139/ssrn.3250224

Fernando Bernstein

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Gregory DeCroix

University of Wisconsin - Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

N. Bora Keskin (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States

HOME PAGE: http://faculty.fuqua.duke.edu/~nk145/

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