Service provision on an aggregator platform with time-sensitive customers: Pricing strategies and coordination

Abstract

The increasing tendency to fulfill customer needs via virtual platforms has led to a rapid growth of sharing economy. This practice allows non-entrepreneurs to set up a business and firms to focus on their core operations by outsourcing tasks related to attracting, finding, contracting, and invoicing customers. Hence, potential entrepreneurs and firms face the question whether to penetrate a market directly or through a platform, and to what extent. In this work, we focus on providers who offer unique services and make a choice between enlisting in a demand aggregator’s platform and reaching the market directly; due to the unique services, we assume that the providers may have sufficient power to set the wholesale price that is paid to the platform. A game-theory model in a queueing framework is developed to address the questions of mode selection and pricing strategies. Such settings allow to include customers who are sensitive in delays in product/services delivery and exhibit strategic behavior. We show that under single-price contracts channel profits are adversely affected due to double marginalization. The latter effect can be mitigated by time-dependent pricing involving delay compensation or a revenue sharing contract, resulting in system coordination. We identify the equilibrium strategies and the provider’s optimal policy. We also derive insights on the combined effects of key parameters such as the market size, the direct cost of customer service, and the aggregator’s reservation level on the optimal pricing strategies, and quantify their impact.