Pricing, Service, and Welfare of Ride‐Hailing Platforms: Flat‐Rate vs. Pay‐per‐Use

ABSTRACT We develop pricing game models to analyze strategic interactions in peer‐to‐peer (P2P) ride‐hailing platforms, focusing on two pricing strategies: flat‐rate and pay‐per‐use pricing. Our findings show that the equilibrium pricing and service levels on these platforms depend on passengers' sensitivity to time (ticking meter costs) and trip mileage. Platforms are more likely to adopt pay‐per‐use pricing when passenger ticking meter costs are low and traffic congestion is high. In terms of welfare, pay‐per‐use generates higher social welfare when ticking meter costs are low and congestion is high, while flat‐rate pricing is welfare‐improving when ticking meter costs are high or congestion is low. However, flat‐rate pricing during peak hours tends to reduce driver service quality and lower welfare for passengers with high ticking meter costs, as platforms do not fully internalize service degradation. Our analysis suggests that regulators should avoid blanket restrictions on either model and instead mandate multiple pricing options, ensure voluntary driver participation in flat‐rate orders, and monitor service quality during congestion. Market competition has minimal impact on the platform's pricing strategy but can paradoxically increase equilibrium fare prices under the pay‐per‐use pricing. Finally, we apply our findings in a case study to examine the regulatory debate surrounding flat‐rate vs. pay‐per‐use pricing in China's ride‐hailing sector.