It is an interesting sort of economic reality to speculate about...but I don't really have enough background to even credibly start.
1) All firms start doing it...because what Producer wants to leave money on the table?
2) The firm that does it best gains a significant advantage over competitors thus leading towards non-competitive market conditions.
And, from a purely speculative perspective, if the price discrimination advantage wasn't strong enough to result in one of the two above situations, then why would a firm invest in this sort of tech anyway?
But, like I said, I am no where near educated enough in the subject matter to really credibly start speculating too far. And it is certainly conceivable that competition could check this trend...but I don't believe it is a sure thing.
Let's say a ride is worth $20 for the consumer and $12 for the producer, for a total surplus of $8. If the price they agree on is $14, the consumer surplus is $6 and the producer surplus is $2.
If the producer can be sure the consumer values the ride at $20, they can charge $19 and take home most of the surplus.
Now lets introduce a competing producer, which is equally competent and can also figure out all this.
By your "what Producer wants to leave money on the table?" theory, they would also charge $19, and maybe get half the market that way.
But obviously they could also charge $18, get all of the market, and make a lot more money. Producer 1 will obviously retaliate and prices will go down.
Competition doesn't always work. It isn't magic. It may even need assistance. But to say it never happens is just... not.
Phone providers are a good example of this: In France for many years there was phone providers with extremely high prices: 50, 60, or even 70 euros per month for unlimited plans. They were all telling how their prices were fair, that they need infrastructure investments, etc etc. Then came a disrupting player: 'Free', who started charging 20 euros per month for the unlimited plans. Immediately, the 3 other players started offering 20-25 euros unlimited plans as well. The infrastructure hasn't suffered from this, 4G came as expected, and Free is now one of the major players.
What would happen in your example, is, unless a 'Free' equivalent shows up, is that they would all charge something around $19.
> In France for many years there was phone providers with extremely high prices
It's a lot easier to spin up a new taxi app that undercuts Uber/Lyft than it is to build new telecom infrastructure.
Nothing's stopping Newber from showing up with a shiny new app and undercutting both, if consumers are upset enough.
Economists have studied this stuff extensively for a very long time, and their consensus is that normally markets are quite effective at keeping prices down, as long as they're kept open.
There are certainly exceptions and corner cases where it works differently, but that is what they are.
As the sibling comment points out : "Nothing's stopping Newber from showing up with a shiny new app and undercutting both". As long as this statement stays true (i.e Lyft/Uber don't abuse their dominant position to prevent competitors to enter the market), then the market should be healthy. I'm not convinced they would though.
But...let's remember first that my intent is not to make claims...I am merely continuing a mental exercise in speculation/critical thinking.
Forgive me if I am over simplifying, but the example you forward is a traditional take on perfect competition.
But I don't think that we should discount the possibility of a lack of competition in this theoretical market. First, Price Discrimination itself requires that the firm doing the discriminating has some degree of monopolistic control/power in the market [1]. The existence of any price discrimination precludes the presence of effective competition in a market.
I think the Uber market is one that already exhibits signs of imperfect competition given the plethora of competitors that have struggled to find a footing:
* https://techcrunch.com/2016/11/08/uber-competitor-karhoo-shu...
* http://austininno.streetwise.co/2016/11/30/scoopme-an-uber-c...
* https://qz.com/583498/uber-competitor-sidecar-is-shutting-do...
Let's further suppose that Uber chooses not to pocket the revenue from this price discrimination immediately and instead re-invests it in the short term to establishing a Network Externality [2].
> Network effects become significant after a certain subscription percentage has been achieved, called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service.
If they keep it up long enough they should be able to slowly grind competitors out of the market. And while they might actually succeed in creating a monopoly, they don't have to in order to start rent-seeking [3]. Arguably, they already are doing so by increasing producer surplus with this price discrimination and widening the gap between rider cost and driver pay.
In this dystopian market state, Uber need not fear competitors because they could reduce their rent-seeking percentage to match or beat new entrants. They could also spread costs of undercutting local competitors to their entire user base (including raising prices on users it identifies using this price discrimination technique that would be willing to stomach the increase) which would allow them to potentially operate at margins unsustainable/unattainable for new competition. This would be a classic monopoly [4].
Now, there is nothing intrinsically bad about markets that have Monopolies...in fact there are some examples where it is more efficient to have a single supplier. But that is a different speculative discussion. I am just trying to explain why competition may not be an effective check to this practice.
TL;DR Uber's market likely already suffers from imperfect competition casting into doubt the effectiveness of competition to check this trend. Moreover, a firm might use price discrimination to carve out network externalities in amenable markets.
[1] http://www.economicsonline.co.uk/Business_economics/Price_di...
[2] https://en.wikipedia.org/wiki/Network_effect
(so riders with options will not choose the fair with a larger supplier surplus)
The reason they invest in the technology is because they are able to utilize it across enormous numbers of fares.
That seems to just skirt around the issue. The basic (Econ 101) point of competition is that if all existing firms are making 100 units of profit, and a new firm can make 50 units of profit by offering an equivalent product at a lower price, then that new firm will take business from the existing firms.
It's something we'll try to explain to our grandchildren and they'll try to understand it like we try to understand how people fought duels in the 17th century.