Service Deployment in the On-Demand Economy: Employees, Contractors, or Both?

TL;DR

This paper analyzes how on-demand service platforms decide between using employees, contractors, or both, to maximize profit through service differentiation and workforce composition, considering customer sensitivity and cost factors.

Contribution

It provides a theoretical framework for optimal service and workforce deployment, highlighting when hybrid or single workforce models are most profitable.

Findings

Hybrid workforce deployment can significantly increase profits.

Single workforce models are optimal under certain cost and value conditions.

Conditions for choosing employees, contractors, or both are identified.

Abstract

The recent advancements in mobile/data technology have fostered a widespread adoption of on-demand or gig service platforms. The increasingly available data and independent contractors have enabled these platforms to design customized services and a cost-efficient workforce to effectively match demand and supply. In practice, a diverse landscape of the workforce has been observed: some rely solely on either employees or contractors, others use a blended workforce with both types of workers. In this paper, we consider a profit-maximizing service provider (SP) that decides to offer a single service or two differentiated services, along with the pricing and staffing of the workforce with employees and/or contractors, to price- and waiting-sensitive customers. Contractors independently determine whether or not to participate in the marketplace based on private reservation rates and per-service wage offered by the SP, while it controls the number of employees who receive per-hour wage. Under a single service, we show that the SP relies on either employees or contractors and identify sufficient and necessary conditions in which one workforce is better than the other. Under the optimal service deployment, we show that the SP offers either a single service relying solely on employees or contractors, or two differentiated services with a hybrid workforce depending on the service value and cost efficiencies of employees and contractors. Our analysis suggests that proliferating services with a blended workforce could improve the SP's profit significantly, and identifies conditions in which this value is significant. Our results provide an in-depth understanding and insightful guidance to on-demand platforms on the design of service differentiation and workforce models.