A theory of multihoming in rideshare competition

• DOI: http://doi.org/10.1111/jems.12306
• Date: 01 January 2019
• Published date: 01 January 2019
• Author: Kevin A. Bryan,Joshua S. Gans

Received: 21 August 2018

|

Accepted: 21 August 2018

DOI: 10.1111/jems.12306

A theory of multihoming in rideshare competition

Kevin A. Bryan

|

Joshua S. Gans

Rotman School of Management,

University of Toronto, Toronto, Ontario,

Canada

Correspondence

Joshua S. Gans, Rotman School of

Management, University of Toronto, 105

St. George Street, Toronto, Ontario M5S

2E8, Canada.

Email: joshua.gans@gmail.com

Abstract

We examine competition among ridesharing platforms, where firms compete on

both price and the wait time induced with idled drivers. We show that when

consumers are the only agents who multihome, idleness is lower in duopoly

than when consumers face a monopoly ridesharing platform. When drivers and

consumers multihome, idleness further falls to zero as it involves costs for each

platform that are appropriated, in part, by their rival. Interestingly, socially

superior outcomes may involve monopoly or competition under various

multihoming regimes, depending on the density of the city, and the relative

costs of idleness versus consumer disutility of waiting.

KEYWORDS

Hotelling, idleness, platform, ridesharing

JEL CLASSIFICATION

L13, L51

1

|

INTRODUCTION

Since Uber’s introduction in 2009, ridesharing platforms, such as Uber, Didi, Grab, and Lyft, have radically transformed

the taxi and limo industry. These services, which allow consumers to order a car to their location via a smartphone

application, now control roughly one‐third of the international taxi market. A ridesharing firm acts as a platform

matching drivers to riders and setting the pricing terms between them. Like other platforms, the incentives of each

group to join a platform are molded by those pricing terms as well as overall liquidity. Specifically, riders value reduced

wait times, which comes from more driver availability on a platform. Likewise, the cost of attracting drivers is lower,

the greater the density and availability of riders. Rideshare platforms can influence such wait times and, hence, the

nature of cross‐group network effects. Here we propose a tractable model of competition in ridesharing designed to

understand how this shapes platform choices and show that welfare generated in this industry has rather subtle

properties.

Subtleties in ridesharing welfare arise for three reasons. First, consumer demand depends both on price and wait

time. Second, wait time depends on a two‐sided match between platforms and consumers. Third, whether rideshare

platforms compete using price or wait time depends critically on whether consumers, drivers, or both multihome. Wait

times will be reduced either because more consumers are bound to a single platform, firms want to attract consumers

from a rival platform, or firms want to make heterogeneous consumers more homogeneous in their demand and,

hence, extract more consumer surplus with a fixed price. A social planner will pay to reduce wait time only when it

increases consumer surplus, not when it simply permits business stealing or homogenizes demand. We will show that

these different motives for competing on wait time versus price imply that welfare may be maximized in any of four

different market structures: monopoly, consumer‐only multihoming duopoly, driver‐only multihoming duopoly, or full‐

multihoming duopoly.

J Econ Manage Strat. 2019;28:89–96. wileyonlinelibrary.com/journal/jems © 2019 Wiley Periodicals, Inc.

|

89

ORIGINAL ARTICLE