Can Two Competing On-Demand Service Platforms be Both Profitable?

37 Pages Posted: 16 Nov 2018

See all articles by Jiaru Bai

Jiaru Bai

SUNY at Binghamton - School of Management

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area

Date Written: November 10, 2018

Abstract

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

Suggested Citation

Bai, Jiaru and Tang, Christopher S., Can Two Competing On-Demand Service Platforms be Both Profitable? (November 10, 2018). Available at SSRN: https://ssrn.com/abstract=3282395 or http://dx.doi.org/10.2139/ssrn.3282395

Jiaru Bai (Contact Author)

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

HOME PAGE: http://jiarubai.net

Christopher S. Tang

University of California, Los Angeles (UCLA) - Decisions, Operations, and Technology Management (DOTM) Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/x980.xml

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