Deterministic and probabilistic service-hailing mode choice for on-demand service platforms

Abstract

To cater to the diverse needs of consumers, on-demand service platforms often provide vertically differentiated services and allow consumers to choose their preferred service class. In the traditional service-hailing mode, consumers choose from vertically differentiated services in a deterministic way. However, an emerging service mode bundles options to allow consumers to choose multiple classes of services simultaneously, after which the system assigns one class, which seems probabilistic from the consumer’s point of view. This paper elucidates the differences between the deterministic (DE) and probabilistic (PR) service-hailing modes in terms of the decision-making and profitability of the on-demand platform. It also investigates the platform’s optimal pricing decisions under the DE and PR modes and service mode choices. This paper constructs a stylized model capturing the participation and interaction behaviors of consumers and self-employed service agents, assuming endogenous supply and demand. The model is used to characterize the platform’s optimal price and wage decisions for vertically differentiated services. The results show that the platform’s pricing strategies and service targets are jointly determined by demand-side and supply-side factors, and whether the platform should adopt DE or PR mode is contingent on the consumers’ basic valuation level and its volatility. Furthermore, exploring a more complex hybrid mode suggests that introducing the bundled option does not necessarily boost the platform’s profit. Our findings offer meaningful insights into the pricing strategies and service-hailing mode selections of on-demand platforms offering vertically differentiated services.