Abstract: The rapid development of ride-sharing services has made service differentiation an important operational decision for platform firms. In practice, some platforms provide ordinary services with relatively low vehicle quality and operating costs, whereas others provide premium services with higher vehicle quality, stricter service standards, and higher operating costs. These two service models differ not only in service quality and cost structure, but also in their effects on consumer participation, driver participation, and platform profitability. This study investigates how a monopolistic ride-sharing platform chooses between ordinary and premium service models, and how this choice affects platform profit, consumer surplus, and driver surplus when participation on both sides of the market is endogenously determined. We develop an analytical framework that incorporates network externalities, where the platform sets the price for consumer and the wage for driver under each service model, and both consumers and drivers decide whether to participate based on their respective utilities. Consumer decisions depend on service quality, price, and network effects, while driver decisions are influenced by earnings, costs, and matching probabilities. Our analysis shows that the premium service model is not always optimal. When the reservation wage gap between ordinary-service and premium-service drivers is sufficiently large, the ordinary service model yields higher platform profit and may also improve consumer surplus and driver surplus. This is because lower driver wage expectations and lower vehicle procurement costs allow the platform to attract sufficient driver supply and consumer demand at a relatively low price. When the reservation wage gap is small, the cost advantage of the ordinary service model weakens, and the premium service model becomes more favorable because higher service quality supports a higher ride price and improves surplus on both sides of the market. Thus, a win-win-win outcome can arise under the ordinary service model when the reservation wage gap is large, whereas it can arise under the premium service model when the gap is small. Numerical experiments further examine how the win-win-win regions vary with market size, driver supply, network externality intensity, service-quality differences, vehicle procurement-cost differences, and rental-cost differences. An extension considering drivers’ multi-homing behavior confirms the qualitative robustness of the main results. This study contributes to the operations management literature on ride-sharing platforms, two-sided markets, and vertically differentiated services by integrating service-mode choice, endogenous participation, and welfare comparison into a unified framework. It also provides implications for platform service-mode selection and differentiated regulation.

Key words: sharing economy, ride-sharing platform, network externality, surplus, vertical differentiation