A Study of Ride-Hailing Platforms’ Business Models in the Presence of Surge Demand

Practice- and Policy-Oriented Abstract This study analyzes whether a ride-hailing platform should adopt a closed business model, that is, serving riders only with platform-owned vehicles, or an open business model, that is, allowing private vehicles to utilize the platform to provide services. Analytical results reveal that the open business model leads to more service supply (supply-augmenting effect) and a lower price increase (price discrimination–hindering effect) in the surge period, both benefiting riders. It also reduces the number of idle vehicles in the normal period, thus resulting in more efficient utilization of vehicle resources. Interestingly, the platform does not always benefit from adopting the open business model. In sum, the open business model always benefits the riders, private drivers, and the society as a whole, but it may not be more profitable for the platform. This interesting result calls for policymakers to incentivize the platform so that it adopts the open business model instead of the closed one.