Evolution of Ride Services: From Taxicabs to Ride Hailing and Self-Driving Cars

Abstract

In recent years decentralized Ride Hailing companies have gained significant market share at the expense of vertically-integrated Taxi companies. Yet, Ride Hailing companies also experienced substantial setbacks, and it is not clear what the endgame between these two competing business models will be. Further, emerging self-driving car technologies, which leads to another form of a vertically-integrated ride service poses further questions on how the industry will shape in the future. In this paper, we aim to gain insights about the evolution and the future of ride services under these two distinct business approaches. We model and analyze competition and entry between Vertically Integrated (VI) and decentralized Ride Hailing (RH) firms. Although the VI model has an advantage for being centralized, we find that when customers are patient, in competition, the RH firm predominantly gains the upper hand in the market with lower delays and higher prices, as well as higher market share and profits even if it has a cost disadvantage. Surprisingly, entry may reduce total vehicle supply, and tends to increase customer waiting times. When customers are impatient, the entry of an inefficient VI firm may even lead to a decrease in social welfare despite introducing competition. Our results provide insights into how decentralized Ride Hailing companies may have a strategic advantage to dominate the market due to their agility and the structure of their business model, and how this can sometimes hurt service quality. Conversely, regulators should also be cautious about subsidizing inefficient Taxi services or self-driving ride services with costly technologies.