Friend or Foe? Flat-Rate Pricing and Supply Outcomes in the Ride-Hailing Market
Abstract: We leveraged a policy change in which a leading ride-hailing company introduced an origin-destination-based flat-fare option alongside a metered option to study the causal effects of flat-rate pricing. We first documented that drivers significantly improved their efficiency in driving distance and trip time on flat-fare trips vis-a-vis metered trips, which benefited riders. Since there was substantial heterogeneity across drivers in their driving efficiency, we used the pre-treatment data to construct an inefficiency index for all drivers under the premise that less efficient drivers would be more affected by the flat-rate option than more efficient drivers. Difference-in-differences analyses were then conducted to identify how flat-rate pricing causally affected drivers’ shift earnings and labor supply. They revealed that the treated, or less efficient, drivers earned higher shift earnings not by extending shift hours (the extensive margin of labor supply) but rather by improving their productivity (the intensive margin of labor supply). There was both a significant direct effect and a significant spillover effect: Flat fares incentivized drivers to take more efficient routes not only on flat-fare trips (a direct effect) but also on metered trips (a spillover effect). The saved driving time enabled drivers to complete more trips and earn more money during shifts that lasted the same amount of time, which benefited drivers. We also found that the earnings enhancing effect of flat-rate pricing was persistent and strengthened over time, and ruled out alternative explanations for drivers’ higher shift earnings, including flat-fare premium, reduced break time, faster driving, and more efficient job searching. Moreover, our evidence suggested that less efficient drivers gained not at the cost of more efficient drivers, i.e., there was no cross-driver spillover effect. Finally, we discussed the implications for ride-hailing platforms and policymakers.