Potential Benefits of On Demand Services Compared with Conventional Taxi ServicesSource: Adapted from: Cramer, J. and A.B. Krueger (2016) “Disruptive Change in the Taxi Business: The Case of Uber”, NBER Working Paper No. 22083.
On-demand taxi services, referred to as ride-sharing services (e.g. Uber, Lyft, and the Chinese Didi equivalent), have significantly impacted the taxi industry since their introduction in the early 2010s. The evolution and growth of these services have reached a point where conventional taxi services cannot compete effectively and are losing market share. Empirical evidence underlines that on-demand services can increase the productivity of vehicles by between 30 and 50% compared with conventional taxi services. The main factors underlining the advantages of on-demand services include:
- Optimal matching. On-demand services rely on advanced matching systems that try to optimally assign a driver (vehicle) to a passenger. This dominantly relies on mobile technologies to match geo-located demand and supply in real-time. This matching considers several factors and tries to optimize the system as a whole. For instance, a vehicle close to a customer may be assigned to a customer further away if assigning another vehicle would reduce the total travel distance. Additional options, including the willingness to share a ride with other passengers, are also offered. Comparatively, conventional taxi services usually assign drivers on an ad hoc basis (such as on-street hailing), which is often efficient (because of long-term knowledge of the demand) but does not work well with complex demand patterns with customers expecting a ride available within a few minutes.
- Scale effect. On-demand services usually benefit from a scale effect by being able to offer services over a larger area and by being able to field more vehicles. They thus have a greater ability to match supply and demand across a metropolitan area and have drivers competing for customers. For instance, demand varies daily in different parts of a city, with vehicles being repositioned accordingly. Conventional taxi services are often limited to a specific area and are much less likely to be able to reach scale effects.
- Regulatory setting. The conventional taxi industry is usually regulated, implying that service areas are defined, the number of vehicles controlled (often through quotas), and fares set. This framework of fixed supply, market areas, and fares was conventionally prone to rent-seeking behavior since users had limited choices. However, this system is also unable to respond effectively to competitive forces.
- Supply and fare flexibility. An important advantage of on-demand taxi services is their ability to quickly adapt to changes in demand by increasing the number of vehicles and fares in acute mismatch situations. They adopt yield management strategies, known as surge pricing, where users are notified of the increase in the fare structure and, therefore, given the option to travel at a higher cost or delay their travel until fares decline. From a supply perspective, higher fares incite additional drivers to make their vehicles available, conferring a flexible mechanism to adapt supply with demand. Because of regulatory constraints, conventional taxi services usually offer a stable number of vehicles, often working in shifts, and are less able to adjust to demand changes. While fares usually remain the same, a surge in demand commonly involves users waiting longer to take a ride, particularly during peak hours.
Due to their nature, ride-sharing services enable a more flexible workforce allocation since providers may decide the time they make their services available and can combine this type of work with other working opportunities.