Surge Pricing and Two-Sided Temporal Responses in Ride Hailing

Abstract

Problem definition: We investigate surge pricing in ride-hailing platforms from a temporal perspective, highlighting strategic behavior by riders and drivers and that drivers respond to surge pricing much more slowly than riders do. Academic/practical relevance: Surge pricing in ride-hailing platforms is a pivotal and controversial subject. Despite abundant anecdotal evidence, strategic behavior by riders and drivers has not been formally studied in the literature. Methodology: We adopt and analyze a classic two-period, game-theoretical model as in the strategic consumer literature. Results: We identify two types of equilibrium pricing strategies. The first consists of a short-lived, sharp price surge followed by a lower price, which we refer to as skimming surge pricing (SSP). The second consists of a low initial price followed by a higher price, which we refer to as penetration surge pricing (PSP). We find that PSP equilibria are generally superior to SSP equilibria when both exist but require platforms to share demand–supply information with drivers. Managerial implications: The SSP equilibrium rationalizes the controversial sharp surge-pricing practice: the short-lived sharp price surge causes many high-value riders to voluntarily wait out the initial surge period, which attracts additional drivers to the region to serve riders at a much lower price than the initial surge price. The theoretically superior PSP equilibrium suggests that a vastly different approach may improve surge pricing and highlights the potential value and importance for platforms to share demand–supply information with drivers.