Pricing Fast and Slow: Limitations of Dynamic Pricing Mechanisms in Ride-Hailing

45 Pages Posted: 28 Sep 2021

Date Written: September 27, 2021

Abstract

Ride-hailing platforms update prices dynamically to efficiently balance supply and demand. But rapidly changing prices create incentives for riders to wait for high prices to drop. When supply builds up and prices do eventually drop, these patient customers may request en masse, causing a sharp drop in supply that triggers the pricing algorithm to increase prices. We present a simple fluid model that shows how dynamic pricing inherently creates such oscillations in supply and prices when riders are patient and strategic. Moreover, we show that these oscillations in supply levels are inherently inefficient due to the convexity of pickup times as a function of “open” (dispatchable) supply. We then show that by changing the service model to allow riders to enter a formal FIFO-queue for low prices – instead of requiring them to engage in ad hoc waiting for the price to drop – this inefficiency can be overcome. Further, by managing the system as a spatial priority queue, the platform can operate even more efficiently than it would in the absence of patient riders. We find that this insight is robust with respect to different model assumptions, and continues to hold in stochastic simulations that supplement our analytical results.

Keywords: ride-hailing, sharing economy, dynamic pricing, revenue management, market design

Suggested Citation

Freund, Daniel and van Ryzin, Garrett, Pricing Fast and Slow: Limitations of Dynamic Pricing Mechanisms in Ride-Hailing (September 27, 2021). Available at SSRN: https://ssrn.com/abstract=3931844 or http://dx.doi.org/10.2139/ssrn.3931844

Daniel Freund (Contact Author)

MIT Sloan School of Management ( email )

100 Main Street
E62-584
Cambridge, MA 02142
United States

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