Changing Seats

While traditional two-sided market theory assumes that consumers are locked into one side of the market, we argue that in some cases, consumers may switch sides while staying within the same platform. We develop a theoretical model of a two-sided platform with flexible users who can act as either buyers or sellers, depending on market conditions. We show that these "switchers" can reduce matching inefficiencies in decentralized markets, but paradoxically increase the platform's market power when it sets prices, thereby reducing the surplus of pure buyers and sellers. Using proprietary data from a global ride-sharing platform, we document large-scale switching behavior. Empirical estimates of user preferences show substantial variation in the preference to drive or ride, and confirm that users respond to economic incentives when choosing their role. Our results suggest considerable variation across markets in the net welfare effects of switching. These results suggest that user flexibility should be accounted for in both regulatory analysis and platform design.

Economic surplus · Incentive · Market power · Preference · Welfare · Digital Platforms and Economics · Sharing Economy and Platforms · Transportation and Mobility Innovations