Journal Article

Spatial Pricing in Ride-Sharing Networks

Bimpikis, Kostas, Saban, Daniela, Candogan, Ozan

2019

Overview

Motivated by the prevalence of ride-sharing platforms, in “Spatial Pricing in Ride-Sharing Networks,” Bimpikis, Candogan, and Saban explore the impact of the demand pattern for rides across a network’s locations on a platform’s optimal pricing and compensation policy, profits, and consumer surplus. They explicitly account for the pricing problem’s spatial dimension and the fact that the drivers endogenously determine whether and where to provide service. Their first contribution is to develop a tractable model to study a platform operating on a network of locations that may differ in both the size of their potential demand and the destination preferences of riders. Second, they provide a characterization of the platform’s optimal policy and identify “balancedness” of the demand pattern as a property that captures the profit potential of a given network. Finally, they discuss the benefits and limitations of a number of alternative pricing and compensation schemes. We explore spatial price discrimination in the context of a ride-sharing platform that serves a network of locations. Riders are heterogeneous in terms of their destination preferences and their willingness to pay for receiving service. Drivers decide whether and where to provide service so as to maximize their expected earnings given the platform’s pricing and compensation policy. Our findings highlight the impact of the demand pattern on the platform’s prices, profits, and the induced consumer surplus. In particular, we establish that profits and consumer surplus at the equilibrium corresponding to the platform’s optimal pricing and compensation policy are maximized when the demand pattern is “balanced” across the network’s locations. In addition, we show that they both increase monotonically with the balancedness of the demand pattern (as formalized by its structural properties). Furthermore, if the demand pattern is not balanced, the platform can benefit substantially from pricing rides differently depending on the location from which they originate. Finally, we consider a number of alternative pricing and compensation schemes that are commonly used in practice and explore their performance for the platform. The e-companion is available at https://doi.org/10.1287/opre.2018.1800 .

• Publisher: INFORMS,Institute for Operations Research and the Management Sciences
• Subject: Compensation / Consumer behavior / Corporate profits / Demand / network flows / Operations research / Prices / Prices and rates / Pricing / Pricing policies / Profits / Retained earnings / revenue management / ride sharing / spatial price discrimination / Transportation industry