Toward identifying the critical mass in spatial two-sided markets

Abstract

Unlike their nonspatial counterparts, spatial multi-sided platforms are matchmaking platforms with an additional layer of complexity: their customers expect to meet in space, not only virtually. This additional challenge will be studied in this paper in the context of a two-sided ride-sharing platform, which serves drivers and passengers. As with any two-sided platform, there is an interdependence between both groups of customers: More drivers are more attractive for passengers, and vice versa. This interdependence creates the old chicken-and-egg problem, only that here drivers and passengers need to be matched not for a virtual transaction, but by their ability to meet physically and travel jointly. We argue, and illustrate by simulations, that in spatial multi-sided markets there is not a single critical mass frontier that needs to be reached in order to make the system self-sustained (as in nonspatial markets), and that this frontier is varying from one location to the next, depending on the density and distribution of the demand and supply over space and time. Identification of the critical mass frontier will allow for better evaluation of implementation policies and regulations.