Competitive ride-hailing markets with double-sided heterogeneity: Impacts of customers’ service valuation and drivers’ reservation earnings

We consider competition between a certain number of platforms (two or more) that facilitate matches between a market of customers and a pool of independent drivers. Each platform sets a price charged to customers and a wage paid to drivers for service through that platform to maximize its own profit. As such, equilibrium supply and demand for each platform are endogenously dependent on the price and wage interactions within the platform and the strategic competition across different platforms. This paper examines how two key features of ride-hailing markets—demand heterogeneity in service valuation and supply heterogeneity in reservation earnings—factor into the platforms’ price and wage decisions and resulting system performances. Our analysis suggests that an increase in the degree of heterogeneity in customers’ service valuation (drivers’ reservation earnings) may result in either higher or lower prices and wages, with lower (higher) prices and wages more likely when the demand (supply) level is high and/or the number of platforms is large. Based on these understandings, we further explore how the platforms’ price and wage decisions in response to changes in market characteristics including the potential demand, the potential supply, and the number of platforms, would be affected by demand heterogeneity in service valuation and supply heterogeneity in reservation earnings. In contrast to the two usual arguments in ride-hailing literature that (i) prices and wages increase in the potential demand and (ii) wages decrease in the potential supply, we find that equilibrium prices and wages may not be monotonic in the potential demand or supply, depending on the degrees of demand heterogeneity in service valuation and/or supply heterogeneity in reservation earnings. Besides, contrary to the common intuition that platform competition results in lower prices and higher wages, we find that entry of an additional platform may result in higher prices (lower wages), when the degree of demand (supply) heterogeneity in service valuation (reservation earnings) is quite high and the number of platforms is quite large.