Service Provision on an Aggregator Platform with Time-Sensitive Customers : Pricing Strategies and Coordination

The increasing tendency to fulfill customer needs via virtual platforms has led to a rapid growth of sharing economy companies such as Airbnb and Uber. This practice allows firms to focus on their core operations, and outsource tasks related to attracting, finding, and contracting customers. Hence, firms face the question whether to penetrate a market directly or through a platform, and to what extent.We develop a model for a provider who offers a unique service and has the option either to enlist in a demand aggregator's platform, or to reach the market directly. We employ a game-theory model in a queueing framework to address the questions of the provider's strategy for selection of service mode and pricing. We show that under single-price strategies channel profits are adversely affected due to double marginalization. The latter effect can be mitigated by time-dependent pricing involving delay compensation, which results in system coordination. We also quantify the impact of key parameters such as the market size, the direct cost of customer service, and the aggregator's reservation level.The main novelty of this study is in modeling a situation where the provider has sufficient market power to set the wholesale price he is paid by the platform, as well as in showing that time-based pricing can induce channel coordination. We identify the equilibrium strategies and the provider's optimal policy. We also derive insights on the combined effects of the market size and the aggregator's reservation level on the optimal pricing strategies