Abstract: The existing studies on the ride-hailing market generally assume that the platform charges drivers a commission in proportion to each order revenue. However, in reality, some ride-hailing platforms start to charge drivers by the two-part tariff, i.e., drivers working for the platforms often pay a fixed commission unrelated to the number of orders besides a commission in proportion to each order revenue. This paper explores the optimal pricing decisions of a ride-hailing platform using the two-part tariff, and how these decisions affect behaviors and welfare of market participants. A simplified microeconomic model is developed to incorporate passengers with heterogeneous valuations, drivers who independently decide their working hours, and a profit-maximizing platform. An M/M/K queueing model is used to characterize passenger waiting times and approximate matching frictions in the ride-hailing market. We optimize the optimal pricing decisions of the platforms under the two commission models and compare the market equilibrium outcomes. The findings are as follows. Compared to the usage-based charge (only charge a commission per order), the two-part tariff reduces the commission per order charged by the platform, increases the working hours of drivers and the orders in the markets. Although the two-part tariff may lead to a loss in driver welfare, passenger welfare and total social welfare are always improved. The driving force behind this welfare enhancement lies in the scale advantage of the two-part tariff, which enables the platform to expand the market more effectively. When the driver pool size is limited, the platform using the two-part tariff tends to provide per-order subsidies to drivers and relies solely on fixed commissions for revenue; only when the driver pool exceeds a certain threshold does the platform extract revenue from both per-order commissions and fixed commissions. The two-part tariff is better in terms of platform profit and social welfare. Furthermore, the driver welfare under the two-part tariff is always impaired when drivers are homogeneous, whilst it may be better when drivers are heterogeneous. Numerical examples based on Hangzhou ride-hailing order data show that the two-part tariff can achieve a win-win-win situation of the platform, drivers and passengers. These results suggest that platforms should tailor their two-part tariffs to market conditions. When driver capacity is scarce, platforms can combine low fixed fees with substantial per-trip subsidies to stimulate labor supply; when driver capacity is abundant, they can increase per-trip commissions to improve profitability. Regulators should assess whether fixed fees are reasonable and prevent dominant platforms from extracting an excessive share of drivers’ earnings, thereby promoting an equitable distribution of benefits and the sustainable development of the industry. More broadly, our findings can inform the design of driver charge schemes that enhance the welfare of all market participants while ensuring the financial sustainability of ride-hailing platforms.

Key words: two-part tariff, usage-based charge, ride-hailing, platform profit, social welfare