Bonus Competition in the Gig Economy

Abstract

Problem definition: The success of a gig platform is crucially driven by its ability to compete for labor supply. However, gig workers are independent contractors whose working schedules are not fully controlled by the platform. To overcome this challenge, gig platforms have commonly relied on bonus strategies to drive participation of gig workers. We study the impact of bonus strategies on gig platforms and their welfare implications. We consider two types of bonus strategies used by gig platforms: 1) fixed bonus that is paid in addition to commissions as long as a service provider participates, and 2) contingent bonus that is paid only if a service provider participates consistently over time. Methodology/results: We develop a game theory model to study platform competition with bonus strategies. Our analysis shows that the two types of bonuses will arise in equilibrium under different market conditions. First, when labor supply is thick, fixed bonus will be offered. In this case, fixed bonus improves platform profit by eliminating a prisoner’s dilemma that arises when the platforms compete only on commissions. However, social welfare will be reduced because the utilization of the labor supply is reduced due to the softened platform competition. Second, when labor supply is thin, contingent bonus will be offered. In this case, contingent bonus reduces platform profit because it intensifies platform competition and traps the platforms in a prisoner’s dilemma where they are forced to offer too much bonus. It further causes inefficiency in matching labor supply with demand and hence reduces social welfare. Managerial implications: First, gig platforms’ competitive bonus strategies can have impact in opposite directions depending on the market condition. Second, social planners should be cautious about gig platforms’ use of bonus strategies in general.

Keywords: gig economy, platform competition, bonus strategies, prisoner’s dilemma, social welfare

JEL Classification: C72, D43, J23, J31, L13