The Poole College of Management is pleased to host Jiaru Bai from Wake Forest University for an operations/SCM seminar on Thursday, November 7th. Her talk will take place from 1:30-3 pm in Nelson Hall, room 2302. The title and abstract of the paper is below.

Title: Pricing Strategy for On-Demand Service Platforms

Abstract:

In the first part of the talk, we consider an on-demand service platform using earning-sensitive independent providers with heterogeneous reservation price (for work participation) to serve its time and price-sensitive customers with heterogeneous valuation of the service. As such, the supply and demand are “endogenously” dependent on the price the platform charges its customers and the wage the platform pays its independent providers. We present an analytical model with endogenous supply (number of participating agents) and endogenous demand (customer request rate) to study this on-demand service platform. To coordinate endogenous demand with endogenous supply, we include the steady-state waiting time performance based on a queueing model in the customer utility function to characterize the optimal price and wage rates that maximize the profit of the platform. We first analyze a base model that uses a fixed payout ratio (i.e., the ratio of wage over price), and then extend our model to allow the platform to adopt a time-based payout ratio. We find that it is optimal for the platform to charge a higher price when demand increases; however, the optimal price is not necessarily monotonic when the provider capacity or the waiting cost increases. We use a set of actual data from a large on-demand ride-hailing platform to calibrate our model parameters in numerical experiments to illustrate some of our main insights.

In the second part of the talk, we discuss competition issues in the on-demand industry. As entrepreneurs develop and as venture capital firms finance various on-demand service platforms, it is important for them to examine whether multiple competing platforms can co-exist profitably. To address this question, we analyze the equilibrium structure by solving different variants of a 2-stage non-cooperative game in which both platforms use lower prices and waiting time to compete for more customers and higher wages and utilization to entice more providers to participate. We find that only one platform can sustain in equilibrium when both firms operate under six operational assumptions 1) Non-exclusive providers; 2) Non-exclusive customers; 3) Pure pricing strategies; 4) Homogeneous services; 5) Homogeneous providers; and 6) Homogeneous customers. We examine whether this “winner-take-all” equilibrium would persist when those operational environmental assumptions are relaxed separately. Our analysis reveals that the “winner-take-all” phenomenon continues to persist under service differentiation, heterogeneous service providers, and promotional pricing strategies. However, both platforms may be profitable when customers are heterogeneous, or when each platform engages providers or customers exclusively. Our results offer insights into different operating environments under which both platforms may co-exist profitably.