Surge Pricing and Two-Sided Temporal Responses in Ride Hailing

Manufacturing & Service Operations Management 24(1) 91-109

40 Pages Posted: 19 Nov 2018 Last revised: 26 Apr 2022

See all articles by Bin Hu

Bin Hu

University of Texas at Dallas - Department of Information Systems & Operations Management

Ming Hu

University of Toronto - Rotman School of Management

Han Zhu

School of Management Science and Engineering, Dongbei University of Finance and Economics

Date Written: August 11, 2020

Abstract

Surge pricing in ride hailing platforms is a pivotal and controversial subject. In this paper, we investigate surge pricing from a temporal perspective; in particular, we highlight the strategic behavior by riders and drivers and that drivers respond to surge pricing much slower than riders. We first identify an equilibrium pricing strategy of a short-lived sharp price surge followed by a lower price that we refer to as skimming surge pricing (SSP). We rationalize the controversial sharp surge pricing practice beyond the basic economic principle of demand and supply and show that it can benefit riders: The short-lived sharp price surge causes many high-value riders to voluntarily wait out the initial surge period, who attract additional drivers to come to the region to serve riders at a much lower price than the initial surge price. We also identify another equilibrium pattern of a low initial price followed by a higher price that we refer to as penetration surge pricing (PSP). We find that PSP equilibria are superior to SSP equilibria, but requires platforms to share demand-supply information with drivers. We extend the base model by accounting for the spatial perspective that drivers need to travel over different distances to the surge region, and gain additional insights on how the driver spatial distribution affects our results. We also show that a flat-fee commission generally increases matching volumes and platform profits compared with proportional commissions. Our findings have practical implications for platforms to improve their surge pricing practices.

Suggested Citation

Hu, Bin and Hu, Ming and Zhu, Han, Surge Pricing and Two-Sided Temporal Responses in Ride Hailing (August 11, 2020). Manufacturing & Service Operations Management 24(1) 91-109, Available at SSRN: https://ssrn.com/abstract=3278023 or http://dx.doi.org/10.2139/ssrn.3278023

Bin Hu (Contact Author)

University of Texas at Dallas - Department of Information Systems & Operations Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Han Zhu

School of Management Science and Engineering, Dongbei University of Finance and Economics ( email )

No. 217 Jianshan St.
Dalian, Liaoning 116025
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
857
Abstract Views
3,551
Rank
54,307
PlumX Metrics