Source: Adapted from: Cramer, J. and A.B. Krueger (2016) "Disruptive Change in the Taxi Business: The Case of Uber", NBER Working Paper No. 22083.
- Driver and passenger matching. On demand services rely on advanced matching systems that try to optimally assign a driver (vehicle) to a passenger. This dominantly relies of mobile technologies able to match geo-located demand and supply on a real time basis. This matching takes a number of factors into consideration and tries to optimize the system as a whole. For instance, a vehicle close to a customer may be assigned a customer further away if assigning another vehicle would reduce the total travel distance. Additional options, including the willingness to share a ride with other passengers, are also offered. Comparatively, conventional taxi services usually assign drivers on an ad hoc basis, which is often efficient (because of long term knowledge of the demand), but does not work well with complex demand patterns with customers expecting a ride available within a few minutes.
- Scale effect. On demand services usually benefit from a scale effect by being able to offer services over a larger area and by being able to field more vehicles. They thus have a greater ability to match supply and demand across a metropolitan area and have drivers competing for customers. For instance, demand varies temporarily in different parts of a city, with vehicles being repositioned accordingly. Conventional taxi services are often limited to a specific area and are much less likely to be able to reach scale effects.
- Regulatory setting. The conventional taxi industry is usually regulated, implying that service areas are defined, the number of vehicles controlled (often through quotas) and fares set. This framework of fixed supply, market areas and fares was conventionally prone to rent seeking behavior since users had limited choice. However, this system is also unable to respond effectively to competitive forces.
- Supply and fare flexibility. An important advantage of on demand taxi services is their ability to quickly adapt to changes in the demand by increasing the number of vehicles as well as increasing fares in situation of acute mismatch. They adopt yield management strategies, known as surge pricing, where users are notified of the increase in the fare structure and therefore given the option to travel at a higher cost, or delay their travel until fares decline. From a supply perspective, higher fares incite additional drivers to make their vehicles available, conferring a flexible mechanism to adapt supply with demand. Conventional taxi services, because of the regulatory constraints, usually offer a stable number of vehicles, often working in shifts, are less able to adjust to demand changes. While fares usually remain the same, a surge in the demand commonly involve users waiting longer to take a ride, particularly during peak hours.