Pricing in Ride-Share Platforms: A Queueing-Theoretic Approach

Ramesh Johari
Stanford University

We study optimal pricing strategies for ride-sharing platforms, such as Lyft, Sidecar, and Uber. Analysis of pricing in such settings is complex: On one hand these platforms are two-sided -- this requires economic models that capture the incentives of both drivers and passengers. On the other hand, these platforms support high temporal-resolution for data collection and pricing -- this requires stochastic models that capture the dynamics of drivers and passengers in the system.

In this paper we build a queueing-theoretic economic model to study optimal platform pricing. In particular, we focus our attention on the value of dynamic pricing: where prices can react to instantaneous imbalances between available supply and incoming demand. We find two main results: We first show that performance (throughput and revenue) under any dynamic pricing strategy cannot exceed that under the optimal static pricing policy (i.e., one which is agnostic of stochastic fluctuations in the system load). This result belies the prevalence of dynamic pricing in practice.
Our second result explains the apparent paradox: we show that dynamic pricing is much more robust to fluctuations in system parameters compared to static pricing. Thus dynamic pricing does not necessarily yield higher performance than static pricing -- however, it lets platforms realize the benefits of optimal static pricing, even with imperfect knowledge of system parameters.

Joint work with Sid Banerjee and Carlos Riquelme.

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