A Study of Ride-Hailing Platforms’ Business Models in the Presence of Surge Demand

Booming demand in the ride-hailing market allows ride-hailing platforms to experiment with different business models. This study analyzes whether a ride-hailing platform should adopt a closed business model, that is, serving riders only with platform-owned vehicles, or an open business model, that is, allowing private vehicles to utilize the platform to provide services. Special attention is paid to the impact of uneven demand during a day; thus, the game-theoretical model we develop features a two-period framework with normal and surge periods. Analytical results reveal that the open business model leads to more service supply (supply-augmenting effect) and a lower price increase (price discrimination–hindering effect) in the surge period, both benefiting riders. It also reduces the number of idle vehicles in the normal period, thus resulting in more efficient utilization of vehicle resources. These effects jointly lead to higher social welfare under the open business model. Interestingly, the platform does not always benefit from adopting the open business model, and a higher level of demand surge has nonmonotonic impacts on the optimality of this model. In sum, the open business model always benefits the riders, private drivers, and the society as a whole, but it may not be more profitable for the platform. This interesting result calls for policymakers to incentivize the platform so that it adopts the open business model instead of the closed one.

History: Ram Gopal, Senior Editor; Atanu Lahiri, Associate Editor.

Funding: This work was supported by the National Natural Science Foundation of China [Grants 72231004, 72394373, and 72022012].

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2022.0695.