Optimal pricing strategy of a bike-sharing firm in the presence of customers with convenience perceptions

Abstract

In the bike-sharing industry, convenience is a critical factor that impacts customers’ travel behavior and bike-sharing firms’ profits. In this paper, we investigate how a bike-sharing firm should develop its pricing strategy when its customers are concerned about the convenience of the trip. Specifically, we develop a model in which a monopolistic bike-sharing firm leases bikes to customers. We use hassle costs to measure the convenience factors. We first examine customers’ travel behavior in the absence of hassle costs. We find that customers’ valuation of the trip and the time-saving advantages of bike-sharing make potential customers more likely to use the bike-sharing service. We analyze the bike-sharing firm’s decision in different scenarios by examining its profit-maximizing pricing strategies. We present several interesting and useful results that are somewhat counterintuitive. When bike-sharing has an advantage in hassle costs, increasing prices increases the demand for bike-sharing because reducing hassle costs saves time for many high-valuation customers, who transition from public transit systems to bike-sharing. By contrast, when bike-sharing has a relative disadvantage in hassle costs, even if the firm reduces prices to attract customers, the lower price cannot neutralize the adverse effects of the hassle cost advantage enjoyed by public transit systems. Public transit systems thus dominate all travel choices. Second, improving the convenience of transportation may not always increase customer surplus, but a low hassle cost yields high social welfare. We also provide guidelines for bike-sharing firms that may help them increase participation in bike-sharing and improve their profits.