Competition between P2P ride-sharing platforms and traditional taxis

Abstract

Over the past decade, the surge of peer-to-peer (P2P) ride-sharing has significantly cut the market share and profitability for taxis, but taxis remain a major service provider in the personal transportation service industry. This paper analytically examines a market with two segments of consumers based on their travel distances, where a P2P platform and a traditional taxi company have different inconvenience costs and compete for customers through pricing. Our analysis shows that consumers’ inconvenience costs and the relative size or travel–distance heterogeneity of the two consumer segments play an important role in determining the firms’ equilibrium targeting and pricing decisions. We find that the taxi's inconvenience cost can have non-monotonic effects on firms’ prices. An increase in the taxi's inconvenience cost can reduce both firms’ profits because it can induce both firms to lower their prices. In an extension, we show that distance-based price discrimination (charging different unit prices based on the consumer's travel distance) can lead to win–win or lose–lose outcomes for both firms. Our results have useful managerial and regulatory implications.