The Value of Adding On-demand Service with Price- and Waiting-Sensitive Customers

The increasing demand for instant gratification has prompted service providers (SPs) to enhance their standard offerings with flexible on-demand services, typically delivered by independent agents or contractors. This paper develops an integrated framework to evaluate the economic value of adding on-demand services, taking into account the varying sensitivities of customers to price and waiting time. Our findings indicate that launching an on-demand service is not always profitable for SPs; however, it can enhance profitability when standard services are relatively slow, provided there is sufficient customer demand and an adequate supply of on-demand providers. Importantly, when the addition of on-demand services benefits the SP, it also leads to improved outcomes for consumers, independent agents, and overall social welfare. We assess the value of offering on-demand services through both theoretical analysis and numerical simulations using real-world data, identifying the key factors that drive this value. Our findings provide practical recommendations for managers on how to effectively design and implement service expansions in the on-demand economy, enabling them to better meet customer needs while optimizing operational efficiency.