Can Two Competing On-Demand Service Platforms be Profitable?

37 Pages Posted: 16 Nov 2018 Last revised: 3 Feb 2020

See all articles by Jiaru Bai

Jiaru Bai

Wake Forest University

Christopher S. Tang

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

Date Written: November 10, 2018

Abstract

Problem Definition: Can two competing on-demand service 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 and wage in a “two-sided” market.

Academic/Practical Relevance: As entrepreneurs develop and as venture capital firms finance various on-demand service platforms, it is important for them to examine whether multiple competing platforms can co-exist profitably.

Methodology: In this paper, we analyze the equilibrium structure by solving different variants of a 2-stage non-cooperative game in which both platforms use lower prices and waiting time to compete for more customers and higher wages and utilization to entice more providers to participate.

Results: We first examine a base case when both firms operate under seven operational assumptions: 1) Non-exclusive providers; 2) Non-exclusive customers; 3) Pure pricing strategies; 4) Constant pricing; 5) Homogeneous services; 6) Homogeneous providers; and 7) Homogeneous customers. We find that only one platform can sustain in a payoff dominant stable equilibrium. We examine whether this “winner-take-all” equilibrium would persist when those operational environmental assumptions are relaxed separately. Our analysis reveals that the “winner-take-all” phenomenon continues to persist under promotional pricing strategies, service differentiation, and heterogeneous service providers. However, both platforms can sustain profitably when each platform engages providers (or customers) exclusively, when platforms adopt time-based pricing strategies, or when customers are heterogeneous.

Managerial Implications: Our results offer insights into different operating environments under which both platforms can both sustain profitably in equilibrium.

Keywords: On-Demand Economy, Non-cooperative Game, Increasing Return, Network Externality, Two-sided Markets, Platform Competition

Suggested Citation

Bai, Jiaru and Tang, Christopher S., Can Two Competing On-Demand Service Platforms be 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)

Wake Forest University ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

HOME PAGE: http://baij.sites.wfu.edu/

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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