IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v68y2022i5p3219-3235.html
   My bibliography  Save this article

Driver Surge Pricing

Author

Listed:
  • Nikhil Garg

    (Operations Research and Information Engineering, Cornell Tech and Technion, New York, New York 10044)

  • Hamid Nazerzadeh

    (Marshall Business School, University of Southern California, Los Angeles, California 90089; Uber Technologies, San Francisco, California 94103)

Abstract

Ride-hailing marketplaces like Uber and Lyft use dynamic pricing, often called surge, to balance the supply of available drivers with the demand for rides. We study driver-side payment mechanisms for such marketplaces, presenting the theoretical foundation that has informed the design of Uber’s new additive driver surge mechanism. We present a dynamic stochastic model to capture the impact of surge pricing on driver earnings and their strategies to maximize such earnings. In this setting, some time periods (surge) are more valuable than others (nonsurge), and therefore trips of different time lengths vary in the induced driver opportunity cost. First, we show that multiplicative surge, historically the standard on ride-hailing platforms, is not incentive compatible in a dynamic setting. We then propose a structured, incentive-compatible pricing mechanism. This closed-form mechanism has a simple form and is well approximated by Uber’s new additive surge mechanism. Finally, through both numerical analysis and real data from a ride-hailing marketplace, we show that additive surge is more incentive compatible in practice than is multiplicative surge.

Suggested Citation

  • Nikhil Garg & Hamid Nazerzadeh, 2022. "Driver Surge Pricing," Management Science, INFORMS, vol. 68(5), pages 3219-3235, May.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3219-3235
    DOI: 10.1287/mnsc.2021.4058
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2021.4058
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2021.4058?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Gérard P. Cachon & Kaitlin M. Daniels & Ruben Lobel, 2017. "The Role of Surge Pricing on a Service Platform with Self-Scheduling Capacity," Manufacturing & Service Operations Management, INFORMS, vol. 19(3), pages 368-384, July.
    2. Dimitris J. Bertsimas & Garrett van Ryzin, 1991. "A Stochastic and Dynamic Vehicle Routing Problem in the Euclidean Plane," Operations Research, INFORMS, vol. 39(4), pages 601-615, August.
    3. Bertsimas, Dimitris & Van Ryzin, Garrett., 1991. "A stochastic and dynamic vehicle routing problem in the Euclidean plane," Working papers 3286-91., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Harish Guda & Upender Subramanian, 2019. "Your Uber Is Arriving: Managing On-Demand Workers Through Surge Pricing, Forecast Communication, and Worker Incentives," Management Science, INFORMS, vol. 67(5), pages 1995-2014, May.
    5. Dimitris J. Bertsimas & Garrett van Ryzin, 1993. "Stochastic and Dynamic Vehicle Routing in the Euclidean Plane with Multiple Capacitated Vehicles," Operations Research, INFORMS, vol. 41(1), pages 60-76, February.
    6. Hao Yi Ong & Daniel Freund & Davide Crapis, 2021. "Driver Positioning and Incentive Budgeting with an Escrow Mechanism for Ridesharing Platforms," Papers 2104.14740, arXiv.org.
    7. Yanzhe (Murray) Lei & Stefanus Jasin, 2020. "Real-Time Dynamic Pricing for Revenue Management with Reusable Resources, Advance Reservation, and Deterministic Service Time Requirements," Operations Research, INFORMS, vol. 68(3), pages 676-685, May.
    8. Chiwei Yan & Helin Zhu & Nikita Korolko & Dawn Woodard, 2020. "Dynamic pricing and matching in ride‐hailing platforms," Naval Research Logistics (NRL), John Wiley & Sons, vol. 67(8), pages 705-724, December.
    9. Judd Cramer & Alan B. Krueger, 2016. "Disruptive Change in the Taxi Business: The Case of Uber," American Economic Review, American Economic Association, vol. 106(5), pages 177-182, May.
    10. Omar Besbes & Francisco Castro & Ilan Lobel, 2021. "Surge Pricing and Its Spatial Supply Response," Management Science, INFORMS, vol. 67(3), pages 1350-1367, March.
    11. Kostas Bimpikis & Ozan Candogan & Daniela Saban, 2019. "Spatial Pricing in Ride-Sharing Networks," Operations Research, INFORMS, vol. 67(3), pages 744-769, May.
    12. Cody Cook & Rebecca Diamond & Jonathan V Hall & John A List & Paul Oyer, 2021. "The Gender Earnings Gap in the Gig Economy: Evidence from over a Million Rideshare Drivers [Measuring the Gig Economy: Current Knowledge and Open Issues]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2210-2238.
    13. Yiwei Chen & Ming Hu, 2020. "Pricing and Matching with Forward-Looking Buyers and Sellers," Manufacturing & Service Operations Management, INFORMS, vol. 22(4), pages 717-734, July.
    14. Sushil Bikhchandani, 2020. "Intermediated surge pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 31-50, January.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Selcuk, Cemil & Gokpinar, Bilal, 2022. "Incentivizing flexible workers in the gig economy: The case of ride-hailing," Cardiff Economics Working Papers E2022/11, Cardiff University, Cardiff Business School, Economics Section.
    2. Ming Hu, 2021. "From the Classics to New Tunes: A Neoclassical View on Sharing Economy and Innovative Marketplaces," Production and Operations Management, Production and Operations Management Society, vol. 30(6), pages 1668-1685, June.
    3. Yongwook Paik & Christos A. Makridis, 2023. "The social value of a ridesharing platform: a hedonic pricing approach," Empirical Economics, Springer, vol. 64(5), pages 2125-2150, May.
    4. Zhong-Zhong Jiang & Guangwen Kong & Yinghao Zhang, 2021. "Making the Most of Your Regret: Workers’ Relocation Decisions in On-Demand Platforms," Manufacturing & Service Operations Management, INFORMS, vol. 23(3), pages 695-713, May.
    5. Amirmahdi Tafreshian & Neda Masoud & Yafeng Yin, 2020. "Frontiers in Service Science: Ride Matching for Peer-to-Peer Ride Sharing: A Review and Future Directions," Service Science, INFORMS, vol. 12(2-3), pages 44-60, June.
    6. Zhang, Kenan & Nie, Yu (Marco), 2021. "To pool or not to pool: Equilibrium, pricing and regulation," Transportation Research Part B: Methodological, Elsevier, vol. 151(C), pages 59-90.
    7. Chen, Mingyang & Zhao, Daozhi & Gong, Yeming & Rekik, Yacine, 2022. "An on-demand service platform with self-scheduling capacity: Uniform versus multiplier-based pricing," International Journal of Production Economics, Elsevier, vol. 243(C).
    8. Meijian Yang & Enjun Xia, 2021. "A Systematic Literature Review on Pricing Strategies in the Sharing Economy," Sustainability, MDPI, vol. 13(17), pages 1-28, August.
    9. Soheil Ghili & Vineet Kumar, 2021. "Spatial Distribution of Supply and the Role of Market Thickness: Theory and Evidence from Ride Sharing," Papers 2108.05954, arXiv.org.
    10. Lars M. Hvattum & Arne Løkketangen & Gilbert Laporte, 2006. "Solving a Dynamic and Stochastic Vehicle Routing Problem with a Sample Scenario Hedging Heuristic," Transportation Science, INFORMS, vol. 40(4), pages 421-438, November.
    11. Liu, Yang & Li, Sen, 2023. "An economic analysis of on-demand food delivery platforms: Impacts of regulations and integration with ride-sourcing platforms," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 171(C).
    12. Zhong, Yuanguang & Lan, Yibo & Chen, Zhi & Yang, Jiazi, 2023. "On-demand ride-hailing platforms with heterogeneous quality-sensitive customers: Dedicated system or pooling system?," Transportation Research Part B: Methodological, Elsevier, vol. 173(C), pages 247-266.
    13. Diego Muñoz-Carpintero & Doris Sáez & Cristián E. Cortés & Alfredo Núñez, 2015. "A Methodology Based on Evolutionary Algorithms to Solve a Dynamic Pickup and Delivery Problem Under a Hybrid Predictive Control Approach," Transportation Science, INFORMS, vol. 49(2), pages 239-253, May.
    14. Barrett W. Thomas & Chelsea C. White, 2004. "Anticipatory Route Selection," Transportation Science, INFORMS, vol. 38(4), pages 473-487, November.
    15. Cristián E. Cortés & Doris Sáez & Alfredo Núñez & Diego Muñoz-Carpintero, 2009. "Hybrid Adaptive Predictive Control for a Dynamic Pickup and Delivery Problem," Transportation Science, INFORMS, vol. 43(1), pages 27-42, February.
    16. Li, Manzi & Jiang, Gege & Lo, Hong K., 2022. "Pricing strategy of ride-sourcing services under travel time variability," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 159(C).
    17. Van Woensel, T. & Kerbache, L. & Peremans, H. & Vandaele, N., 2008. "Vehicle routing with dynamic travel times: A queueing approach," European Journal of Operational Research, Elsevier, vol. 186(3), pages 990-1007, May.
    18. Zhang, Jian & Woensel, Tom Van, 2023. "Dynamic vehicle routing with random requests: A literature review," International Journal of Production Economics, Elsevier, vol. 256(C).
    19. Omar Besbes & Francisco Castro & Ilan Lobel, 2021. "Surge Pricing and Its Spatial Supply Response," Management Science, INFORMS, vol. 67(3), pages 1350-1367, March.
    20. Noah Gans & Garrett van Ryzin, 1999. "Dynamic Vehicle Dispatching: Optimal Heavy Traffic Performance and Practical Insights," Operations Research, INFORMS, vol. 47(5), pages 675-692, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3219-3235. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.