Capacity Expansion in Service Platforms: Financing vs. Employment

46 Pages Posted: 20 Apr 2020

See all articles by Heikki Peura

Heikki Peura

Imperial College Business School

S. Alex Yang

London Business School

Date Written: March 30, 2020

Abstract

Service platforms connect consumers to independent service providers in a growing number of industries.In pursuit of further growth, platforms aimed to attract providers who do not yet possess the requisite assets to provide the service (e.g., cars for ride-hailing). In order to expand capacity, platforms have trialled innovative mechanisms, including financing the providers' investment and offering employment-like contracts. The viability of such programs remains an open question.

We study a two-stage game-theoretic model with a platform and service providers, and two scenarios in terms of who invests in service assets. Under financing, the providers invest in assets, financed through either a bank or the platform. The platform subsequently sets the wage, and the providers decide whether to serve on the platform or an outside option. Under employment, the platform itself invests in asset capacity, and offers providers an exclusive employment contract.

We find that conventional bank financing of the providers' investments results in both capacity under-investment and under-utilization due to a holdup problem. Simple interest-based platform financing can partly alleviate these inefficiencies, but suffers from free-riding when the providers also have access to bank financing. Platform financing incorporating an activity-based loan discount can mitigate these issues and benefit the platform, especially when the investment cost is high and the new providers' outside options are valuable. Compared to financing, the platform prefers employing providers when the investment cost is low, the market demand is high, and when the providers' outside options are unattractive.

Our results reveal that both financing and employment can be viable options for service platforms to expand capacity, yet their success depends on both market conditions and contract terms (e.g., platform financing terms should be closely tied to providers' on-platform contributions).

Keywords: platform economy, OM-Finance interface, capacity investment, holdup, free-riding

Suggested Citation

Peura, Heikki and Yang, S. Alex, Capacity Expansion in Service Platforms: Financing vs. Employment (March 30, 2020). Available at SSRN: https://ssrn.com/abstract=3564074 or http://dx.doi.org/10.2139/ssrn.3564074

Heikki Peura

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

S. Alex Yang (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/sayang/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
25
Abstract Views
191
PlumX Metrics