Queueing Versus Surge Pricing Mechanism: Efficiency, Equity, and Consumer Welfare

68 Pages Posted: 13 Oct 2020 Last revised: 17 Nov 2020

See all articles by Yueyang Zhong

Yueyang Zhong

The University of Chicago Booth School of Business

Zhixi Wan

The University of Hong Kong - Faculty of Business and Economics

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR)

Date Written: September 24, 2020

Abstract

At the end of 2017, the leading ride-hailing platform DiDi Express replaced the commonly used surge pricing mechanism with a queueing mechanism, called the virtual queueing mechanism, in a number of cities across China to mitigate public relations pressure. To explore the benefits of the virtual queueing mechanism over the surge pricing mechanism in terms of operational efficiency, equity, and consumer welfare, we build a model of a data-driven state-dependent open queueing network, which we show can be approximated by an M/M/s+M queueing model with balking and reneging. We derive closed-form expressions for multiple performance metrics, including response rate, demand satisfaction rate, gross merchandise value (GMV), consumer surplus, and degree of inequality. Our theoretical and numerical analyses show that: (1) the virtual queueing mechanism outperforms the surge pricing mechanism in terms of consumer surplus, but is not as advantageous to generate GMV; (2) with respect to the response rate and demand satisfaction rate, the virtual queueing mechanism performs increasingly better than the surge pricing mechanism as demand increases; (3) the virtual queueing mechanism contributes to a more equitable ridesharing system, in the sense that consumer surplus is distributed across different classes of riders in a more balanced way. Using real data, we conduct a case study in Beijing, which verifies all the aforementioned results. The case study further finds that the response and demand satisfaction rates are significantly correlated with driver idleness.

Keywords: surge pricing; observable queue; mechanism; abandonment, consumer welfare, equity

Suggested Citation

Zhong, Yueyang and Wan, Zhixi and Shen, Zuo-Jun Max, Queueing Versus Surge Pricing Mechanism: Efficiency, Equity, and Consumer Welfare (September 24, 2020). Available at SSRN: https://ssrn.com/abstract=3699134 or http://dx.doi.org/10.2139/ssrn.3699134

Yueyang Zhong (Contact Author)

The University of Chicago Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Zhixi Wan

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Zuo-Jun Max Shen

University of California, Berkeley - Department of Industrial Engineering & Operations Research (IEOR) ( email )

IEOR Department
4135 Etcheverry Hall
Berkeley, CA 94720
United States

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