Regulating Ridesourcing Services with Product Differentiation and Congestion Externality

Transportation Research Part C: Emerging Technologies, Volume 127, 2021,103088, ISSN 0968-090X, https://doi.org/10.1016/j.trc.2021.103088.

32 Pages Posted: 2 Mar 2020 Last revised: 25 Apr 2021

See all articles by Daniel Vignon

Daniel Vignon

University of Michigan at Ann Arbor

Yafeng Yin

University of Michigan, Ann Arbor

Jintao Ke

The University of Hong Kong

Date Written: November 28, 2020

Abstract

This paper proposes a model of the ridesourcing market in presence of traffic congestion and with the provision of both solo and pooling services. Our analysis of the first-best solution shows that, under a highly congested scenario, the ridesourcing platform may enjoy non-negative profits. However, when congestion is low, the ridesourcing market must be subsidized due to low marginal costs of operation. This mirrors previous findings in the traditional taxi literature. We also demonstrate that a commission cap on the solo service combined with a congestion toll (however small) on ridesourcing vehicles can induce any desired, sustainable equilibrium under the assumption of homogeneous value of travel time and sufficient supply of homogeneous drivers. Furthermore, numerical experiments suggest that the most important problem that a regulator should address when faced with a monopoly may not be that of congestion but rather that of market power. Indeed, when congestion is high, similar to previous findings in the literature, decisions by the monopolist tend to mirror that of the regulator. This is because customers on the platform must also bear the congestion cost, which hurts the platform’s revenues. Additionally, numerical examples reveal that, even when accounting for heterogeneity in the value of travel time, the commission cap is able to achieve the second-best–whether combined with a toll or not. This confirms the effectiveness of the commission cap strategy illustrated in previous literature and provides decision makers with a simple, non-intrusive mechanism for regulating the market.

Keywords: Ridesourcing service, regulation, pooling, congestion externality, commission cap, and congestion toll

JEL Classification: D40, D42, L50, L91, R40, R41

Suggested Citation

Vignon, Daniel and Yin, Yafeng and Ke, Jintao, Regulating Ridesourcing Services with Product Differentiation and Congestion Externality (November 28, 2020). Transportation Research Part C: Emerging Technologies, Volume 127, 2021,103088, ISSN 0968-090X, https://doi.org/10.1016/j.trc.2021.103088., Available at SSRN: https://ssrn.com/abstract=3531372 or http://dx.doi.org/10.2139/ssrn.3531372

Daniel Vignon (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Yafeng Yin

University of Michigan, Ann Arbor ( email )

2350
Hayward Street
Ann Arbor, MI 48109
United States

Jintao Ke

The University of Hong Kong ( email )

Hong Kong
China

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