Impact of regulation on on-demand ride-sharing service: Profit-based target vs demand-based target

The advent of on-demand ride-sharing platform provides a ripe example for exploration of the benefits derived from the sharing economy. However, the detriments imposed on the benefits of taxi service cannot be ignored. Although the impact of on-demand ride-sharing service on taxi service has been widely discussed, how to regulate the entrant (on-demand ride-sharing service) remains controversial. Motivated by this, we analyze the effect of the price regulation on the platform's pricing decision in the competition between taxi service and on-demand ride-sharing service. First, we construct a Nash equilibrium game model, considering two types of on-demand ride-sharing services, high-end service (e.g. UberBLACK) and low-end service (e.g. UberX). Second, we introduce the price regulation into the model by adding constraints into the feasible platform price. We examine the impact of two regulation targets, of which one is based on the profit of taxi service with franchise fee (PTR regulation) and the other is based on the demand of taxi service without franchise fee (DTR regulation) on platform's pricing decision. We demonstrate that the platform price is not lower with regulation than without regulation. Our findings provide evidence that two services could coexist without regulation under some circumstance, which depends on taxi price. Our findings also indicate that PTR regulation can result in either lower or higher regulatory intensity, with higher regulatory intensity more likely when the taxi price is low. Furthermore, we explore the impact of the regulation on the social welfare. We find that the regulation does not improve the social welfare unless the platform offers the low-end service, and the two services are highly homogeneous.