Can two competing on-demand service platforms be profitable?

Abstract

Can two competing on-demand service platforms be profitable in equilibrium? This question is well-studied for firms competing purely on price in a single-sided market, but it is not well-understood for competing service platforms that use price to influence passenger demand and wage to influence driver participation in a “two-sided” market. To fill this research gap, we analyze the equilibrium structure of 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.To explicate our analysis and isolate the effect of each element, we first examine a parsimonious and stylized model that is based on the case when both firms operate under seven operational assumptions: (1) Non-exclusive providers; (2) Non-exclusive customers; (3) Pure pricing strategies; (4) Constant pricing; (5) Homogeneous services; (6) Homogeneous providers; and (7) Homogeneous customers. We find that only one platform can sustain in a payoff dominant stable equilibrium. Then 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 promotional pricing strategies, service differentiation, and heterogeneous service providers. Interestingly, we find both platforms can sustain profitably when each platform engages providers (or customers) exclusively, when platforms adopt time-based pricing strategies, or when customers are heterogeneous. Our results offer insights into different operating environments under which both platforms can both sustain profitably in equilibrium.