Matching and Network Effects in Ride-Hailing

Abstract

A recent empirical literature models search and matching frictions by means of a reduced-form matching function. An alternative approach is to simulate the matching process directly. In this paper, we follow the latter approach to model matching in ride-hailing. We compute the matching function implied by the matching process. It exhibits increasing returns to scale, and it does not resemble the commonly used Cobb-Douglas functional form. We then use this matching function to quantify network externalities. A subsidy on the order of $2 per trip is needed to correct for these externalities and induce the market to operate efficiently.