Thickness and Competition in Ride-sharing Markets

We study the effects of thickness and competition on the equilibria of ride-sharing markets, in which price-setting firms provide platforms to match customers (“riders”) and workers (“drivers”). To study thickness, we vary the number of potential workers (“the labor pool”) and, to study competition, we change the number of firms from one to two. When the market is sufficiently thick, wage and workers’ average welfare decrease with size of the labor pool. Otherwise, wage and workers’ average welfare increase with the labor pool, reversing the prediction by the law of demand. Intuitively, workers are “complements” in a thin market –their wage and average welfare goes up with the labor pool– but they become “substitutes” and compete with each other in a thick market. We demonstrate that a similar insight holds in another context: consider improving the matching technology, i.e. improving the matching algorithm of the firm so that service quality goes up, given the same labor supply. We show that improving the matching technology can be like increasing the labor pool, benefiting workers when the market is not sufficiently thick, while otherwise reducing their wage and average welfare. In other words, matching technology complements labor in a thin market, but substitutes it in a thick market. We study competition by comparing the monopoly and duopoly equilibria. We find that competition benefits workers: their wage and average welfare are always higher in the duopoly equilibrium. However, the effect of competition on price and customers’ average welfare depends on thickness, because firms compete for workers as well as for customers. When the market is not sufficiently thick, there is an adverse effect of competition on customers: price is higher and customers’ average welfare is lower in the duopoly equilibrium. ∗Department of Economics, Stanford University. Email: [email protected]