Off-Platform Threats in On-Demand Services

Problem Definition: Online platforms that provide on-demand services are often threatened by the phenomenon of leakage, where customer-provider pairs may decide to transact "off-platform" to avoid the platform’s commission. We study the key characteristics of a service vulnerable to leakage, and propose and evaluate a potential approach that a platform may employ to curb leakage. Academic/Practical Relevance: In practice, much attention has been given to platform leakage, with platforms experimenting with multiple approaches to alleviate leakage and maintain their customer and provider bases. Yet, studies in the operations literature that systematically analyze the key factors behind platform leakage are lacking. Our work fills this gap and answers practical questions regarding sustainability of platform operations. Methodology: We employ a game-theoretical model that captures service providers' and customers' decisions whether to conduct their business on or off the platform. Results: We characterize the mechanism behind the platform leakage. Specifically, platform leakage occurs only if customers attach substantially different valuations to services delivered by different provider groups. Conversely, the propensity of leakage is suppressed when customers have a greater aversion to waiting or if they face greater counterparty risk from off-platform transactions. Finally, we propose and analyze a mechanism to curb leakage via provider training. Managerial Implications: Our results provide guidance to existing platform managers and entrepreneurs who are considering "platforming" their services. Namely, based on a few key factors, managers can assess the severity of the threat of platform leakage for their specific business settings. In addition, our results suggest that efforts to reduce heterogeneity among providers can be an effective managerial lever to counteract the threat of leakage.