Service Quality and Wage Differentiation in Two-Sided Ridesharing Platforms

Abstract

We examine the quality differentiation strategy, which is widely adopted by sellers in product markets, for a two-sided ridesharing platform that matches drivers with riders. The riders have different valuations for waiting time, which is one measure of service quality, and drivers have different service costs. Unlike product markets, the ridesharing platform faces a self-scheduled supply where drivers individually decide whether to offer their service and they may also be strategic in accepting a ride request. The platform can possibly use driver wage to control driver supply, but this, in turn, affects the service quality. We show that the ridesharing platform would offer quality-differentiated services only when the rider-side cannibalization is not high, which is consistent with findings in product markets. A platform that can control driver supply through wage has more incentive to offer quality-differentiated services than a platform that cannot if the rider-side cannibalization is low, but the reverse can happen if the rider-side cannibalization is moderate. In the presence of strategic drivers, offering differential wages to control driver supply leads to adverse effects from driver-side cannibalization as well. An increase in the driver-side cannibalization diminishes the platform's incentive to practice wage differentiation as well as the incentive to offer quality-differentiated services. On the other hand, an increase in the rider-side cannibalization can enhance the platform's incentive to practice wage differentiation.