Matching Technology and Competition in Ride-hailing Marketplaces

Abstract

Over the last decade, taxis have experienced persistent market share loss to new ride-sharing platforms like Uber. Compared to taxis, these platforms have two main advantages: (i) while taxis rely on curbside hailing, Uber centrally dispatches drivers; and (ii) by avoiding taxi industry regulations, Uber supply responds to market conditions while taxi supply remains inelastic. We study whether and how taxis can compete with Uber within their industry's regulatory constraints. We construct a model in which operational frictions from matching passengers and cars are the primary driver of competition between taxis and Uber for wait-sensitive passengers. Because the two ride-hailing services may employ different matching technologies and may supply different numbers of drivers, a passenger's wait depends on which service she patronizes. To account for these differences, we study a grid city that drivers must traverse (according to the appropriate matching technology) to pick up passengers who arrive randomly throughout the city. Our analysis confirms that the status quo is terrible for taxis – when calibrated to New York City data, taxis capture a negligible market share. We consider two strategies to improve their competitiveness. The first modifies taxi matching technology to imitate Uber, while the second restricts the area taxis serve via curbside hailing. Though many taxi companies have implemented the former, it is a poor strategy for improving taxi market share when Uber is established (i.e., has many registered drivers). Instead, we find the latter, lower-tech strategy guarantees an improvement in taxi market share relative to the status quo.

Keywords: Gig Economy, Urban Transportation, Matching Markets, Service Time Competition, Curbside Hailing

JEL Classification: C70, D40, L90