Subscription vs. Spot Pricing in On-Demand Economy

Abstract

Why do on-demand service platforms (e.g., Uber) predominantly use spot pricing, i.e., charging customers a contingent fee per service, rather than subscription, i.e., a lump-sum fee for multiple service accesses? To answer this question, we develop a game-theoretic queueing model to study the optimal profits of an on-demand service platform under different pricing schemes. Customers randomly arrive at the platform and decide whether to request a service based on the platform's pricing policy and the expected waiting disutility. Under subscription, the platform collects a lump-sum fee from customers upfront but gives those subscribers free access to services on the spot. In contrast, under spot pricing, the platform only charges customers a contingent fee on the spot. The platform's operations entail a fundamental tension between service level and revenue: the more customers accommodated, the longer each customer needs to wait for service on average, and the fewer customers' net surpluses that the platform can extract. Unlike subscription, which only allows the platform to manage this tradeoff upfront, spot pricing empowers the platform to balance these two forces in a real-time manner and ensures the platform a higher amount of profit than under subscription. Indeed, such a dynamic marketplace control is so significant that pure spot pricing outperforms mixed pricing (i.e., a mix of subscription and spot pricing) and can generate the same amount of profit as the two-part tariff; in large markets, the platform also affords to accommodate more customers under spot pricing. The profit premium under spot pricing is robust when workers' participation incentives hinge on the volume of customer requests and when customers have heterogeneous service valuations. Our work sheds light on the economic forces behind on-demand platforms' pricing practices and the implications of different pricing schemes for an on-demand service market.

Keywords: subscription, spot pricing, on-demand economy, queueing games