Spatial Distribution of Supply and the Role of Market Thickness: Theory and Evidence from Ride Sharing

TL;DR

This paper combines theory and empirical analysis to examine how economies of density influence the spatial distribution of ride-sharing drivers, revealing a supply skew toward busier areas especially for smaller platforms.

Contribution

It develops a theoretical model predicting spatial supply skew and introduces an empirical method to test this using ride-level data, with evidence from NYC.

Findings

Supply skews toward busier areas, more so for smaller platforms.

Platforms use prices and wages to mitigate spatial skew.

Empirical evidence supports the theoretical predictions.

Abstract

This paper studies the effects of economies of density in transportation markets, focusing on ridesharing. Our theoretical model predicts that (i) economies of density skew the supply of drivers away from less dense regions, (ii) the skew will be more pronounced for smaller platforms, and (iii) rideshare platforms do not find this skew efficient and thus use prices and wages to mitigate (but not eliminate) it. We then develop a general empirical strategy with simple implementation and limited data requirements to test for spatial skew of supply from demand. Applying our method to ride-level, multi-platform data from New York City (NYC), we indeed find evidence for a skew of supply toward busier areas, especially for smaller platforms. We discuss the implications of our analysis for business strategy (e.g., spatial pricing) and public policy (e.g., consequences of breaking up or downsizing a rideshare platform)