A Balancing Act of Regulating On-Demand Ride Services

• Published in: Management science Vol. 66; no. 7; pp. 2975 - 2992
• Main Authors: Yu, Jiayi Joey, Tang, Christopher S., Max Shen, Zuo-Jun, Chen, Xiqun Michael
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01.07.2020; Institute for Operations Research and the Management Sciences
• Subjects: Business models; consumer welfare; Consumers; Councils; Drivers; on-demand ride services; public policy; Regulation; Ride sharing services; Social welfare; Stakeholders; Taxicabs; Traffic accidents & safety
• DOI: 10.1287/mnsc.2019.3351
• ISSN: 0025-1909

Regulating on-demand ride-hailing services (e.g., Uber and DiDi) requires a balance of multiple competing objectives: encouraging innovative business models (e.g., DiDi), sustaining traditional industries (e.g., taxi), creating new jobs, and reducing traffic congestion. This study is motivated by a regulatory policy implemented by the Chinese government in 2017 and a similar policy approved by the New York City Council in 2018 that regulate the “maximum” number of registered Uber/DiDi drivers. We examine the impact of these policies on the welfare of different stakeholders (i.e., consumers, taxi drivers, on-demand ride service company, and independent drivers). By analyzing a two-period dynamic game that involves these stakeholders, we find that, without government intervention, the on-demand ride service platform can drive the traditional taxi industry out of the market under certain conditions. Relative to no regulations and a complete ban policy, a carefully designed regulatory policy can strike a better balance of multiple competing objectives. Finally, if a government can reform the taxi industry by adjusting the taxi fare, then lowering the taxi fare instead of imposing a strict policy toward on-demand ride services can improve the total social welfare. This paper was accepted by Serguei Netessine, operations management.