The online integration of competitive on-demand service markets

Problem definition: As platforms for on-demand services flourish, a novel online integration trend rises to promote service efficiency. In view of pioneers like the ride-hailing industry, this paper explores the formation and impacts of online integration, where the third-party integrator establishes an integrated platform (IP) by delivering matching orders for participating service providers (SPs) and implements a commission policy on SPs’ actual completed revenue share. Methodology: We employ a three-stage game-theoretic approach to formulate the IP establishment process as a non-linear mixed-integer mathematical problem. By inspecting SPs’ feasibility and the integrator’s profitability, we derive analytical integration results in various typical markets, specify their impacts on the engaged parties, and propose regulating policies. Results: We have found that the integration outcome is primarily shaped by four interactive featured forces and obtained insightful findings. First, within the same IP, profit redistribution among differently sized SPs hinders larger SPs’ from integration as their comparative advantage diminishes. Second, excessive integration may inadequately stimulate customer demand and transform competitors into collaborators, thus reducing SPs’ interest in integration. Moreover, the integrator also circumvents excessive integration scale in the trade-off with commission rates for higher earnings. These findings deepen our understanding of contrasting IP situations in diverse real-world markets. For example, all minor SPs are possibly integrated if an extremely dominant SP exists like in China ride-hailing services, and the integration of two major SPs is less likely if they are divergent in size alike in the U.S. Further regarding the impacts, we find that the profit extraction can eclipse the integration benefits, impairing the entire industry particularly when worker supply is sufficient or balanced. Managerial implications: Integrators should make subtle decisions on market intervention and integration scale in consideration of market fragmentation, demand elasticity, supply levels, etc. Regulators can adopt a ceiling-commission policy towards integrators to safeguard the industry welfare.