Can Two Competing On-Demand Service Platforms be Both Profitable?
37 Pages Posted: 16 Nov 2018
Date Written: November 10, 2018
When two on-demand service platforms use lower prices and shorter waiting time to compete for more customers and higher wages and utilization to compete for more independent providers, can both platforms be profitable in equilibrium? The question is well-studied for firms competing purely on price in a single-sided market, but it is not well-understood for on-demand service platforms competing on price, waiting time and wage in a "two-sided" market. Also, as entrepreneurs develop and as venture capital firms finance new on-demand service platforms, it is important to examine whether multiple platforms can co-exist profitably in a competitive market. We analyze the equilibrium structure by solving different variants of a 2-stage non-cooperative game in which two platforms use lower prices and waiting time to compete for more customers and higher wages and utilization to entice more providers to participate. We first examine a base case when both firms operate under six operational assumptions: 1) Homogeneous services; 2) Homogeneous providers; 3) Homogeneous customers; 4) Pure pricing strategies; 5) Non-exclusive providers; and 6) Constant pricing. When the waiting time exhibits a certain "pooling" effect, we find that the classical Bertrand equilibrium persists: both firms earn zero profit in equilibrium. Interestingly, when the waiting time fails to possess this "pooling" effect, we find that both firms may both be profitable in equilibrium. Besides this condition, we examine whether the Bertrand equilibrium would persist when those operational environmental assumptions are relaxed separately. Our analysis reveals that the Bertrand equilibrium continues to persist under service differentiation, heterogeneous service providers, promotional pricing strategies, and surge pricing. However, both platforms may be profitable when customers are heterogeneous or when each platform engages providers exclusively. Our results offer insights into different operating environments under which both platforms may co-exist profitably. Not only do our results complement existing duopoly theory that focuses on single-sided market, but our results also provide some prerequisite conditions for entrepreneurs and Venture Capital firms to evaluate the viability of on-demand service platforms.
Keywords: On-Demand Economy, Duopoly, Two-sided markets, Platform Competition
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