Strategic Surge Pricing and Forecast Communication on On-Demand Service Platforms

Abstract

On-demand service platforms (e.g., Uber, Lyft) match consumers with independent workers nearby at short notice. To manage fluctuating supply and demand conditions across market locations (zones), many on-demand platforms provide market forecasts to workers and practice surge pricing, wherein the price in a particular zone is temporarily raised above the regular price. We jointly analyze the strategic role of surge pricing and forecast communication explicitly accounting for workers' incentives to move between zones and the platform's incentive to share forecasts truthfully. Conventional wisdom suggests that surge pricing is useful in zones where demand for workers exceeds their supply. However, we show that when the platform relies on independent workers to serve consumers across different zones, surge pricing is also useful in zones where supply exceeds demand. Because individual workers do not internalize the competitive externality that they impose on other workers, too few workers may move from a zone with excess supply to an adjacent zone requiring additional workers. Moreover, the platform may have an incentive to misreport market forecasts to exaggerate the need for workers to move. We show how and why distorting the price in a zone with excess supply through surge pricing can increase total platform profit across zones, by incentivizing more workers to move and by making forecast communication credible. Our analysis offers insights for effectively managing on-demand platforms through surge pricing and forecast sharing, and the resulting implications for consumers and workers.