Capacity Expansion in Service Platforms: Ownership, Commitment, and Flexibility

Abstract

Service platforms connect consumers to independent providers who typically deliver the service using their own assets (e.g., ride-hailing with suitable vehicles). To expand their services, platforms have introduced programs aimed at attracting prospective providers who lack the requisite assets. These programs diverge in terms of asset ownership and contract structures. In platform financing, the platform offers to finance providers' asset investments, serving as an alternative to  bank loans. Under employment and rental schemes, by contrast, the platform itself invests in assets and offers them to providers through long-term employment-like contracts or short-term rentals. This paper develops a game-theoretical model to study the viability and relative performance of these mechanisms. With bank financing as the benchmark, we find that while each mechanism can be profitable, they also face distinct challenges. For example, platform financing often fails to benefit the platform in its simple interest-only form, and instead requires payments tied to providers' on-platform performance. Comparing these mechanisms highlights a trade-off between the platform committing to a mutually beneficial contract with the providers and leveraging their flexibility as independent service providers. Consequently, the platform prefers the strongest commitment option---employment---when demand is high and investment cost is low, and turns to the flexible financing or rental options as demand weakens or investment cost increases. Additionally, we find that minimum-wage regulation could benefit not only service providers but also the platform, particularly under financing. Finally, when the providers' outside options rely less on access to assets, employment gains ground as the preferred expansion strategy.

Keywords: platform economy, capacity investment, financing, employment, rental, holdup, free-riding