Behavior-Based Pricing in On-Demand Service Platforms With Network Effects

Abstract

Many on-demand service platforms have begun to implement behavior-based pricing (BBP). Unlike traditional firms, these platforms have network effects and function as intermediaries that connect providers with consumers, while not charging any fees to providers. In this study, we consider two horizontally differentiated on-demand service platforms and examine how BBP adoption affects the platforms’ profit and consumer/provider surplus under network effects. The results show that network effects and the discount factor play critical roles in determining whether BBP can yield higher profits. When the platforms are sufficiently myopic, and the strength of cross-side network effects is relatively weak, using BBP generates more profits; otherwise, using BBP makes the platform worse off. BBP always creates higher consumer surplus, reduces the average consumer surplus of switchers, and increases the average consumer surplus of repeat consumers. BBP always decreases the surplus of providers serving switchers and conditionally increases the surplus of providers serving repeat consumers. Under asymmetric BBP, platforms will not always engage in poaching the rival's consumers and consumers are worse off with poor services. Using asymmetric BBP can be lose–lose, lose–win, or win–win for platforms and consumers, which depends on the relationship between the perceived value, network effects, and service quality.