An Empirical Analysis of Market Formation, Pricing, and Revenue Sharing in Ride-Hailing Services

Abstract

We empirically study the two-sided market for ride-hailing services and the effects of pricing policies and regulation on the value generated by these platforms. We first develop a discrete choice model for the formation of mutually dependent demand (consumer side) and supply (driver side) that jointly and endogenously determine pricing. Using this model and a comprehensive data set obtained from the largest mobile ride platform in China, we estimate consumer and driver price elasticities as well as other factors that affect market participation for the two main markets the company hosts, namely basic ride-hailing and taxi services, with a high level of model fit. Based on these estimation results and counterfactual analysis, we demonstrate that surge pricing improves consumer and driver welfare as well as platform revenues, while reducing taxi revenues on the platform. However, our analysis suggests that surge pricing can hurt consumer surplus and platform revenues during non-peak hours, and hence should be used selectively during the day. We show that platform revenues can be maximized by increasing drivers' revenue share from the current levels. We measure the effects of proposed regulations such as imposing ride-hail price hikes, and demonstrate that they would decrease consumer and driver surplus significantly. Finally, we estimate that the platform's basic ride-hailing services generated consumer value equivalent to more than 32 Billion USD in China in 2017.