Capacity Expansion in Service Platforms: Financing vs. Employment
46 Pages Posted: 20 Apr 2020
Date Written: March 30, 2020
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
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