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Driver Surge Pricing

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  • Nikhil Garg
  • Hamid Nazerzadeh

Abstract

Ride-hailing marketplaces like Uber and Lyft use dynamic pricing, often called surge, to balance the supply of available drivers with the demand for rides. We study driver-side payment mechanisms for such marketplaces, presenting the theoretical foundation that has informed the design of Uber's new additive driver surge mechanism. We present a dynamic stochastic model to capture the impact of surge pricing on driver earnings and their strategies to maximize such earnings. In this setting, some time periods (surge) are more valuable than others (non-surge), and so trips of different time lengths vary in the induced driver opportunity cost. First, we show that multiplicative surge, historically the standard on ride-hailing platforms, is not incentive compatible in a dynamic setting. We then propose a structured, incentive-compatible pricing mechanism. This closed-form mechanism has a simple form and is well-approximated by Uber's new additive surge mechanism. Finally, through both numerical analysis and real data from a ride-hailing marketplace, we show that additive surge is more incentive compatible in practice than is multiplicative surge.

Suggested Citation

  • Nikhil Garg & Hamid Nazerzadeh, 2019. "Driver Surge Pricing," Papers 1905.07544, arXiv.org, revised Mar 2021.
    • Handle: RePEc:arx:papers:1905.07544
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    Cited by:

    1. Hao Yi Ong & Daniel Freund & Davide Crapis, 2021. "Driver Positioning and Incentive Budgeting with an Escrow Mechanism for Ridesharing Platforms," Papers 2104.14740, arXiv.org.
    2. Lei, Zengxiang & Ukkusuri, Satish V., 2023. "Scalable reinforcement learning approaches for dynamic pricing in ride-hailing systems," Transportation Research Part B: Methodological, Elsevier, vol. 178(C).
    3. Chenglong Zhang & Jianqing Chen & Srinivasan Raghunathan, 2022. "Two-Sided Platform Competition in a Sharing Economy," Management Science, INFORMS, vol. 68(12), pages 8909-8932, December.
    4. Hao Yi Ong & Daniel Freund & Davide Crapis, 2021. "Driver Positioning and Incentive Budgeting with an Escrow Mechanism for Ride-Sharing Platforms," Interfaces, INFORMS, vol. 51(5), pages 373-390, September.
    5. Sergey Naumov & David Keith, 2023. "Optimizing the economic and environmental benefits of ride‐hailing and pooling," Production and Operations Management, Production and Operations Management Society, vol. 32(3), pages 904-929, March.
    6. Keith, David R. & Naumov, Sergey & Rakoff, Hannah E. & Sanches, Lars Meyer & Singh, Anuraag, 2024. "The effect of increasing vehicle utilization on the automotive industry," European Journal of Operational Research, Elsevier, vol. 317(3), pages 776-792.

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