Events

Mr. Yingkang Xie
Ph.D. Candidate in Marketing
Kellogg School of Management
Northwestern University

Leakage happens when buyers and sellers coordinate outside the platform to cut out the middleman, usually to avoid paying fees. Although platforms are concerned about losing revenue, leakage—by its very nature—is hard to measure and manage. Using geolocation data from a large on-demand service platform for cargo delivery, we identify offline transactions that are typically hard to track in online marketplaces. We exploit a quasi-experiment that gradually introduced driver commissions, thereby generating variation in participants’ incentives for leakage. The introduction of this commission increased leakage by nearly four percentage points, doubling the percentage of offline transactions we detected. We leverage the variation in commission fees to estimate price sensitivities and transaction costs in a structural model. The likelihood of leakage increases as the quoted price of the delivery increases, as the drivers’ potential savings in the commission exceed the costs of offline coordination. Our model estimates suggest that customers typically receive half of the commission savings from drivers to rationalize their agreement to leakage. Counterfactuals show that a stronger bargaining power of customers would exacerbate platform leakage. To conclude, we discuss how targeting coupons, monitoring technology, and strategic matching policy can mitigate leakage by aligning incentives, which are alternatives to ex-post punishments.