Market Formation, Pricing, and Value Generation in Ride-Hailing Services

Problem definition: We empirically study the market for ride-hailing services. In particular, we explore the following questions: (i) How do the two-sided market and prices jointly form in ride-hailing marketplaces? (ii) Does surge pricing create value, and for whom? How can its efficiency be improved? (iii) Can platforms’ strategy on revenue sharing with drivers be improved? (iv) What is the value generated by ride-hailing services, including hosting rival taxi services on ride-hailing apps? Methodology/results: We develop a discrete choice model for the formation of mutually dependent demand (customer side) and supply (driver side) that jointly determine pricing. Using this model and a comprehensive data set obtained from the largest mobile ride platform in China, we estimate customer and driver price elasticities and other factors that affect market participation for the company’s two main markets, namely, basic ride-hailing and taxi services. Based on these estimation results and counterfactual analysis, we demonstrate that surge pricing improves customer and driver welfare as well as platform revenues while counterintuitively reducing taxi revenues on the platform. However, surge pricing should be avoided during nonpeak hours because it can hurt both customer and platform surplus. We show that platform revenues can be improved by increasing drivers’ revenue share from the current levels. Finally, we estimate that the platform’s basic ride-hailing services generated customer value equivalent to $13.25 billion in China in 2024, and hosting rival taxi services on the platform boosted customer surplus by $3.6 billion. Managerial implications: Our empirical framework provides ride-hailing companies a way to estimate demand and supply functions, which can help with optimization of multiple aspects of their operations. Our findings suggest that ride-hailing platforms can improve profits by containing surge-pricing to peak hours only and boosting supply by increasing driver compensation. Finally, our results demonstrate that restricting ride-hailing services create significant welfare losses, whereas including taxi services on ride-hail platforms generates substantial economic value. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.0502 .