The Role of Surge Pricing on a Service Platform with Self-Scheduling Capacity

Gerard Cachon, Operations, Information and Decisions, The Wharton School; Kaitlin Daniels, Operations, Information, and Decisions, The Wharton School; and Ruben Lobel, Operations, Information and Decisions, The Wharton School

Abstract: Recent platforms, like Uber and Lyft, offer service to consumers via “self-scheduling” providers who decide for themselves how often to work. These platforms may charge consumers prices and pay providers wages that both adjust based on prevailing demand conditions. For example, Uber uses a “surge pricing” policy, which pays providers a fixed commission of its dynamic price. We find that the optimal contract substantially increases the platform’s profit relative to contracts that have a fixed price or fixed wage (or both) and although surge pricing is not optimal, it generally achieves nearly the optimal profit. Despite its merits for the platform, surge pricing has been criticized in the press and has garnered the attention of regulators due to concerns for the welfare of providers and consumers. However, we find that providers and consumers are generally better off with surge pricing because providers are better utilized and consumers benefit both from lower prices during normal demand and expanded access to service during peak demand. We conclude, in contrast to popular criticism, that all stakeholders can benefit from the use of surge pricing on a platform with self-scheduling capacity.

Read the full working paper here.