The VCG pricing policy with unit reserve prices for ride-sourcing is 34-individual compatibility

Abstract

We consider a customized matching and pricing mechanism for ride-sourcing services in which drivers and riders disclose their willingness to accept (WTA) per unit distance and their willingness to pay (WTP) per unit distance, respectively. The platform then matches drivers and riders based on their reports to maximize the total social surplus. While this strategy is motivated to promote transparency, fair pricing, and participant satisfaction, it faces a particular challenge to ensure riders and drivers truthfully report their valuations, which are considered private information. To encourage truthful reports, we implement the Vickrey–Clarke–Groves pricing policy augmented with unit reserve prices, referred to as VCG-URP. For the riders, the reserve price is set as the minimum WTP per unit distance, while for the drivers, it is the maximum WTA per unit distance. We demonstrate that VCG-URP ensures that riders provide truthful valuations. However, it does not guarantee the same level of honesty from drivers in reporting their valuations. While drivers cannot enhance their utility by overstating their unit WTA, they may benefit from understating it. These theoretical results are confirmed by numerical experiments with several additional findings: (i) although the under-reporting strategy of the drivers theoretically has an opportunity to achieve a higher utility, it always leads to a decrease in expected utility over randomly generated matching scenarios; (ii) the introduction of reserve prices has larger impacts on riders than drivers and benefits the platform in excluding less profitable trips; and (iii) the performance of VCG-URP is reasonably robust towards the market density, while the VCG price is less applied when the market becomes sparse, mainly due to the loss of substitutability among participants. All these findings bring valuable insights into ride-sourcing services in practice.