Street Orders as an Outside Option: Incentives and Information Disclosure of Taxi-Hailing Platforms

Abstract

Taxi drivers face intensified competition in the private transport industry following the entry of independent contractor drivers on ride-hailing platforms. To secure demand, taxi drivers increasingly join platforms, yet differ from ride-hailing drivers in that they can serve both platform orders and street orders (e.g., roadside hailing or taxi stands) and switch between them. The availability of street orders as an outside option creates a decision problem for taxi drivers and compels platforms to carefully design incentives-such as commissions and subsidies-to attract participation. A key distinction is that while ride-hailing platforms typically do not disclose trip destinations before pick-up to prevent cherry-picking behaviors, many platforms provide trip information to taxi drivers to compete against street-order opportunities. Consequently, taxi drivers need to choose between platform orders with known trip information but positive pick-up time and street orders without advance information but zero pick-up time. This article studies how taxi drivers optimally choose between platform and street orders and how platforms should design incentive schemes to maximize profit. To this end, we develop a game-theoretical model and characterize equilibrium strategies. We show that allowing taxi drivers to serve both platform and street orders is optimal for the platform, whereas enforcing exclusivity limits platform profit because street orders exist as an outside option and protect drivers' surplus. Furthermore, disclosing trip distance reduces the platform's subsidy burden relative to nondisclosure. These results remain robust across alternative settings, including homogeneous orders, zero commissions and subsidies, distance-based subsidy schemes, and heterogeneous pick-up times.