Integrated Reward Scheme and Surge Pricing in a Ride-Sourcing Market

Abstract

Surge pricing is commonly used in on-demand ridesourcing platforms to dynamically balance demand and supply, although it is controversial and has long stimulated debate regarding its pros and cons. In practice, there is usually a reasonable or legitimate range of prices. However, such a constrained surge-pricing strategy may fail to balance demand and supply in certain cases—e.g., even adopting the highest allowed price cannot reduce peak-period demand to a level at which the market clears without some form of non-price rationing. To address this limitation, we propose a novel reward scheme integrated with surge pricing: Passengers pay an additional amount to a reward account on top of the regular surge price during peak hours, then use the balance in their reward account to subsidize trips during off-peak hours. We propose models to describe the number of travel requests and the number of active drivers on the platform, and characterize the market equilibrium under several assumptions. We compare scenarios with and without the reward scheme from three perspectives: passenger utility, driver income, and platform revenue and profit. We find that in some situations, all three stakeholders—i.e., passengers, drivers, and the platform—will be better off under the reward scheme integrated with surge pricing.