Competition between P2P Ridesharing Platforms and Traditional Taxis

Abstract

Over the past decade, the surge of peer-to-peer (p2p) ridesharing has significantly cut the market share and profitability for taxis, but taxis remain a major service provider in the personal-transportation service industry. This paper analytically examines a market with two segments of consumers based on their travel distances, where a p2p platform and a traditional taxi company have different inconvenience costs and compete for customers through pricing. Our analysis shows that consumers’ inconvenience costs and the relative size of the two consumer segments are two significant factors in determining the firms’ equilibrium targeting and pricing decisions. We find that an increase in the taxi’s inconvenience cost can have non-monotonic effects on firms’ prices. An increase in the taxi’s inconvenience cost, which reduces the consumer’s utility from a taxi ride, can result in an increase in the taxi price or a decrease in both firms’ equilibrium prices. In this scenario, an increase in the taxi’s inconvenience cost can make both firms worse off. In an extension, we show that distance-based price discrimination (charging different unit prices based on the consumer’s travel distance) can lead to win-win or loss-loss outcomes for both firms depending on the taxi’s inconvenience cost and the relative size of the consumer segments. Our results have useful managerial and regulatory implications.

Keywords: ridesharing, ride-hailing, taxi, platform, gig economy, peer-to-peer, sharing economy, pricing, price discrimination

JEL Classification: L13, L5, D43, M21, M31