Ride-hailing demand elasticity: a regression discontinuity method

Seyed Ali Madanizadeh, Hosein Joshaghani () and Reza Moradi ()
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Hosein Joshaghani: Tehran Institute for Advanced Studies, Khatam University
Reza Moradi: University of Toronto

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2023, vol. 50, issue 4, No 8, 907-932

Abstract: Abstract Using the unique pricing method of Tapsi, the second-largest ride-hailing company in Iran, we estimate the price elasticity of demand for Tapsi rides. Tapsi mechanically divides Tehran, the largest city of Iran, into 256 regions using a 16 × 16 matrix of straight lines, to implement surge pricing in response to excess regional demand or supply. Surge multiplier works for all ride requests within each region, independent of supply and demand in neighboring regions or rides characteristics. We exploit this sharp discontinuity in pricing by running a regression discontinuity to estimate the causal effect of the price change on the number of ride requests, i.e., price elasticity of demand. Using information of more than 10 million unique ride requests, we estimate not only average price elasticity, but also price elasticity at different levels of surge multiplier. Moreover, we measure price elasticity for 1-h and 6-h horizons and estimate the price elasticity of − 0.25 and − 0.54 for each horizon, respectively. This can be explained by the fact that in longer horizons, customers can more easily choose alternative modes of transport. This finding supports the very fundamental economic principle of higher elasticities in the long-run than in the short-run. Furthermore, we find that dynamic pricing generated by Tapsi creates consumer surplus as large as 6.5 times the total revenue of Tapsi.

Keywords: Estimating demand elasticity; Regression discontinuity design; Ride-hailing applications; Two-sided markets (search for similar items in EconPapers)
JEL-codes: C55 L90 L91 R40 R41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s40812-022-00225-1

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