‘ Capacity Expansion in Service Platforms: Financing vs. Employment‘
by Heikki Peura
Imperial College Business School
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Abstract
Service platforms connect consumers to independent service providers in a growing number of industries. In need of expanding capacity to better serve demand, some platforms aim at new providers who do not yet possess the requisite assets to provide the service (e.g., cars for ride-hailing). This paper examines the viability and relative performance of two innovative mechanisms platform have trialled to attract such potential providers: platform financing (the providers invest in assets, financed through the platform; the platform subsequently sets the wage, and the providers decide whether to serve on the platform or an outside option) and employment (the platform itself invests in asset capacity, and offers providers an exclusive employment contract). We consider a two-stage game-theoretic model consisting of a platform, its existing providers, and potential providers with uncertain labor productivity and outside option. We find that relative to bank financing, platform financing with an interest-only loan fails to benefit the platform nor the service providers when the asset investment cost is low. In contrast, platform financing with terms linked to on-platform activities greatly improve platform profitability, especially when the investment cost is high and the new providers’ outside options are valuable. Compared to financing, the platform prefers employing providers when the investment cost is low, the market demand is high, and when the providers’ outside options are unattractive. Stronger indirect network effect and capacity pooling further enhance the relative performance of employment-like contracts.
Heikki Peura is an Assistant Professor of Operations and Analytics at Imperial College Business School. His research examines firms’ pricing and risk management strategies, with a focus on the energy industry. His work has been published at Management Science, Operations Research, and Manufacturing & Service Operations Management. Heikki holds a PhD in Management Science and Operations from London Business School and an MSc in Engineering Physics and Mathematics from Aalto University.
