Big tech is built on predatory pricing
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I have a friend in SF who takes Uber to work every day. It's about 3.5 miles. I assumed he was dropping boatloads of money but he told me it's $2.50 each way! The IRS estimates vehicles costs alone at about $0.55 a mile and that's not including actual pay to the driver and Ubers cut. Offering a service at this price is not only unfair to for-profit competitors but messes with public transport as well. It's using VC money to crowd out the market.
Unlike with cloud services (the other example) it's much harder for competition to Uber to reappear once it's disappeared. There's a fixed supply of willing drivers and big network effects at play.
What is Uber's network effect? Most people I know will use whatever app gives them the cheapest ride / will drive for multiple companies.
There might even be an opportunity for a $1 app that tells you which service you should use at any given time/location.
Too few drivers you get long waits or surge prices. Too few riders and the drivers start to disappear...
Network effect is when each user brings additional users (or each user prevents other users from leaving).
For every additional driver, the density of drivers on a map gets higher. When this happens, statistically the closest driver will take X less time to get to you.
Two sided markets are not about having a minimum number of people.
Two sided markets are literally a network effect.
https://en.m.wikipedia.org/wiki/Two-sided_market
The "traditional" network effect is describing one sided markets. But it is a normal economic concept to talk about the two sided network effect as well.
Think of it this way. In a 1 sided network, ever user type A makes it more valuable for other user type As.
In a two sided market every User A makes the network more valueable for User type Bs. And every User type B makes it more valuable for user type As.
If everyone is spaced evenly around the place and there's no congestion, you need four times as many drivers to halve response times. For a while you get good gains per additional driver, but as the numbers increase the marginal benefit tails off. This means a new player with some capital can likely compete (and is probably what the grandparent meant by "saturation".)
In most two-sided markets, the ratio of users on both sides plays a more important role than absolute numbers.
Uber sees this through its financing, application, comms network, drivers, members/subscribers, and political influence.
Transport, comms, data/information, knowledge itself, and land are all classic networks, subject to network effects, and monopoly pressures.
What Uber is doing here should absolutely not be allowed.
Loss leading itself could also be regulated more. For example, in France it's illegal to resell something for less than the price you paid for it (except during regulated "sales" periods). This prevents companies coming in and using their funds to subsidize the products.
I could see the argument that Uber is a reseller, given they're not part of the actual taxi experience
I can see what they're trying to address, but commerce is fickle and often times unpredictable.
What if I thought I saw an opportunity to do business but it turned out to be a bad judgement and now I have 20,000 count of something that isn't moving and I have better things to do than wait for the sale period and at least get half my money back and reinvest it in something else I think might turn a profit?
Maybe there is more to the law than the simple scenario you've laid out. Otherwise that seems stifling.
But, all of that has been struck down by the EU courts since it was found in violation of new EU consumer protection directives.
There are exceptions for perishable goods and for products that have been rendered obsolete due to technological progress. I think there are some other force majeure exceptions.
It's a bit stifling, but it means that huge retailers can't destroy smaller businesses just due to their huge capital reserves. It helps to preserve competition in the retailing space. And worst case you just have to handle it for a couple of months.
I'm not sure how preventing any time sales helps sole proprietor shops, as big enterprise can simply sell barely above cost till they sink the mom and pops. If they are looking to protect the consumer a better tact is preventing the boost and cut pricing tactic to make a sale seem like a good deal.
So I guess no BOGO/BOGOFs?
You can totally do things like BOGO if you're selling things way above cost, or if you're not a reseller but the actual manufacturer of the good.
An example of this is take out pizza, which usually offers BOGO if you don't opt for delivery.
The Sales rule is usually about when you are just being a market maker and not part of the production process itself. Similar rules exist for things like book sellers (you can not discount the price of a new book by more than 5% of the MSRP).
While I agree it's hard to outlaw or regulate loss leading, since it seems to be a common go-to-market strategy, it prevents the smaller guys from competing. It allows those with the upper hand (more capital) to remain dominant and starve out the competition. And the feared result, could very well occur. I wouldn't trust the United States to regulate as heavily as it used to, especially under the purview of Donald Trump.
Monopolies are not illegal.
No, they aren't. But can you think of any examples of a company that built a monopoly and refrained from exploiting it to the detriment of the market and consumers in the long term?
It's not Uber Pool it's some new product I hadn't heard of before he mentioned it. Shared ride with a fixed pickup point.
I see the same pricing you see when I use Uber/Lyft.
Uber drivers are generally decent drivers, but they're still not as well trained as bus drivers, they're more likely to be distracted by e.g. fiddling with the uber or map apps on their phone.
Unless you have numbers specifically about uber's fleet being significantly safer than typical drivers, your claim goes against the results of recent studies finding busses and rails safer than cars.
Public transport has the downside of being public, and given the rise of homelessness and the fall of noncommercial venues where e.g. youth can hang around, it's inevitable that they end up in public transport - and create a feeling of unsafeness for other users.
Honestly, the biggest change brought by Uber, AirBNB, etc. is the reputation and recourse systems. They have brought a lot of accountability to systems that historically were low on them on both sides. The newly-found accountability allowed a lot of new entrants to these markets that weren't saddled with the high levels of process that had been used in the past to impose even a little accountability on these services.
Not my experience really. I've filed at least two successful reports of harassment with local police and one complaint against a bus driver at the responsible bus organization.
Paid service apartheid?
FTFY
I see others pointing out in sub-threads that these services are better than buses because there are "no hobos, gangstas, creeps, drunkards or other people creating a nuisance for fellow travellers".
Should I break down those labels and across which lines they are dividing society? :)
Are you implying that only 'lower-class' people are "hobos, gangstas, creeps, drunkards or other people creating a nuisance"? I ride public transit daily, and there is a non-trivial number of 'high-class' people that make riding the metro a pain (The subway is full, why are you pushing and shoving to get in if there is another subway coming in 60 seconds?)
There are probably people who wouldn't want to take public transit because of the list of people strictly because they deem themselves above or as better than the "hobos, gangstas, creeps, drunkards". With no evidence to back my claim, I would argue that the majority of people who would opt for Uber over public transit do so because of lower cost, convenience, and "other people creating a nuisance for fellow travellers"
I realize that this is a problem for a very small number of people who really can't conform because they don't have access to showers, but how often are homeless people really riding busses, let alone uber (other than as a place to get warmth, or in being dumped in another state)?
Do you prefer to be the dumper or the dumpee? Because I prefer to be the latter.
> Unlike with cloud services (the other example) it's much harder for competition to Uber to reappear once it's disappeared.
It's just a car. Its super easy to break into that market. And there are competitors. They do not have a sustainable monopoly.
Few will fund a company to compete against an incumbent who is large and powerful enough to do this to you. There are other battles to be fought, so why risk it?
Public transportation can't handle the load across the country. If everyone starts using VC subsidized services, that FIXES the public transportation under capacity problem.
Public transportation loses money. So if people find something better or cheaper, then all the better!
If no one uses public transit, public transit will be hurt clearly.
The real risk though is that people who can afford uber start using it, public transit fails, and then uber increases its price since people have fewer options.
> Public transportation loses money. So
Public transit loses money in a narrow view of things. In the grand scheme though, it's paid for by tax dollars and is for the good of the public.
There have been a few studies that show accessible public transit is a huge factor in benefiting the poor[0].
The fact that it's subsidized by taxes (and thus moreso by the rich than the poor) is part of the reason it can benefit those people who aren't so well off.
If a VC subsidized service takes over, well, VC subsidization is a far less sustainable method of providing for the poor than taxes.
0: https://www.nytimes.com/2015/05/07/upshot/transportation-eme...
No doubt being able to travel is a huge benefit. But this does not require public transport. The poor could be given Uber-vouchers.
I'm curious as to the arguments that can be made for (presumably government) subsidies for privatized individual transport. I'd be shocked if we see Uber pivot from normal vehicles into mass transit so we have to assume they continue using the current model.
At that point we're offering vouchers for semi-private drivers because...we don't like public transit?
It is not about 'nobody' using it. It is about less people, than the already too much people who are using it.
> There's a fixed supply of willing drivers ...
The supply of willing drivers varies by wages. Also the supply of willing passengers varies by prices. Uber's success depends on being able to entice drivers with higher wages and passengers with lower prices. To the extent that they are successful, they make both groups better off.
> Unlike with cloud services (the other example) it's much harder for competition to Uber to reappear once it's disappeared. There's a fixed supply of willing drivers and big network effects at play.
This is exactly backwards. Once a large network of drivers and passengers connected by smartphones has been established, a competitor has only to offer its own smartphone app to compete. The hard part is building the network and changing people's behaviors.
Back in "the day," VCs (at least some) would tell you directly that they wouldn't invest in anything that competes with Microsoft. The legality of it all was irrelevant to the conversation- they weren't going to enter the fight.
> monopoly in the region
There is no monopoly in transportation. People can drive their own cars, take buses, take taxies, ride Lyft, walk, bike, etc. Uber is creating a network.
> This not only discourages the competition, it discourages the existence of competition.
Discouraging competition is the same as discouraging the existence of competition.
To compete effectively against any good business requires investment. Uber is competing against the taxi network, bus services, zipcar, etc. Uber's strategy requires investment in building a network of drivers that can quickly reach anyone in the service area. To build this network, they have to invest in drivers and passengers. They do this by paying drivers more than they produce and offering passengers service for less than it costs. As more drivers and passengers join the network, costs come down, service gets better, prices may be able to be raised, and Uber may be able to recoup its investment and earn a profit. Maybe. if they earn too much of a profit by charging passengers too much or paying drivers too little, they risk being replaced by other app makers who offer Uber's network of drivers and passengers a better deal.
It's uncertain if Uber will be profitable. But in trying to be profitable, Uber is definitely offering drivers and passengers better options than what they already have (otherwise, the drivers and passengers would not be using Uber).
They provide a particular type of transportation services, just like the cable company provides a particular type of information service. The cable company can have a monopoly even though you can still read a newspaper for information.
I understand what they are doing, i.e., their strategy. That's not the question. The question is whether or not it is or it should be legal. I honestly don't know the answer to this but there is absolutely no question they are using their size to smash their competition. They could use an alternative strategy, like the rest of us do, such as start with a smaller size and grow demand 'organically' by having a better experience than the bus, taxi, and lyft. But they have a lot of financial muscle and they are using it, for better or worse, to demolish the competition that is in place and intimidate those who are considering it. My guess is that it'll be pretty effective if they can pull it off.
i.e. there's a fixed supply of willingness?
It looks like the first thing happened but the second didn't. Prices might have rebounded a bit at a Wal-Mart after their initial arrival in a community, but they didn't rebound enough to match (much less surpass) the old prices of Bob's Local Hardware Store or Alice's Wine and Spirits.
It's hard to tell if Amazon's retail aim is genuinely predatory the way the author accuses it, or if Amazon's just planning to legitimately, sustainably live with lower margins than other retailers, by dint of huge scale and long term cost-containment efforts. They're investing in roboticized warehouses and have no brick-and-mortar retail locations apart from Whole Foods.
Of course, there are also places where quality shouldn't be cut, and other side-effects of the drive to lower prices (lower pay for workers, etc). But this still seems like a subjective judgment call to be made on a case-by-case basis, not an obvious black-and-white issue.
Most of the cheap stuff on the bottom shelf at $LocalStore can also be bought at Walmart. The difference is that at more specialized stores you have options other than "value-priced" and big box stores tend to have house branded products that are as cheap or slightly cheaper than the cheapest thing at a specialized store.
I can go to my hardware store and get Lenox blades for my reciprocating saw or I can get Black and Decker. I might or might not be able to get the lowest end product line from a reputable brand or some Chinese re-brand that's an unlicensed copy of said lowest end product line. At Walmart I can only get whatever the cheapest product line Black and Decker is because that's not their specialty.
In cases where there only consumer options available are the "value priced" options there's no difference. The one tube cutter you can buy at your local hardware store is going to be the same one you can buy at Walmart, Harbor Freight, or from an eBay drop shipper. If you want a Reed, Rigid or some other "professional" brand you'll have to go to somewhere else. If your local hardware store specializes in plumbing or HVAC you might find one but I wouldn't count on it.
VCs have a monopoly over user attention through their connections to industry influencers. They essentially control all the tech blogs and media channels and they use them to drive traffic to companies that they have invested in.
Bloggers are rewarded for doing writeups on VC-backed startups and they are punished for doing writeups on bootstrapped startups.
VCs also drive up online advertising prices to make it not viable for small players to compete based on CPC.
Finally, VCs have a monopoly over acquisition channels within most large corporations so they can make sure that your startup will never be acquired by a large corporation unless you accept VC funding.
For the last decade, the tech industry has been ripe with corruption and injustice. That's why we have cryptocurrencies now, it's a desperate solution to allow people to sidestep the entirety of the existing system.
It's not just VC money.
For example, YouTube has been financed by Google search, operating at a loss for many years, driving competitors out of business and raising barriers to entry.
If this keeps going, eventually we're going to end up with one giant mega-corporation which owns everything. There will be no more government to protect citizens; everyone will work for that company and it will be the most unfair class system imaginable.
The same with Uber, will they ever really kill off Lyft, local taxi services (especially with local government fighting them doing so) and public transit, as well as the other competitors springing up. It seems like a massive transfer of VC wealth to the public without a really well thought out plan as to when and how they will be in a position that they can securely raise the prices. I think they will never be able to. That a tactic has worked in some industries and situations does not mean it will work in every situation. I mean where I live there are other, non-Uber services that allow you to easily pick up cars sitting around the city by using your app to get into them. These are also competitors. Self driving cars might allow them to cut costs, but these will also allow others to compete on other services. In short, I think the VCs who dream of Uber someday gouging their customers are deluded, and the same for Bezos - if that day was ever gonna come it would have come some time ago.
Not even losing money, just lower profits than last year. But apparently it's now evil for companies to invest for the long term rather than boosting their quarterly numbers.
You say "Prime has been proven to be losing money the more a customer buys" like that isn't an obvious consequence of having flat pricing for shipping. The idea that Prime and Amazon's shipping as a whole are a loss leader isn't a new insight.
Used this calculator: http://www.thehindu.com/data/how-many-indians-are-richer-tha...
"exclusive control of a commodity or trade," 1530s, from Latin monopolium, from Greek monopolion "right of exclusive sale," from monos "single, alone" (from PIE root men- (4) "small, isolated") + polein "to sell," from PIE root * pel- (4) "to sell."*
https://www.etymonline.com/word/monopoly
There's a related term, little used today, that references actively seeking to control a market with an interest in manipulating price:
To purchase either the whole or large quantities of, for the purpose of enhancing the price and making a profit; hence, to take or assume in undue quantity, proportion, or degree; as, to engross commodities in market; to engross power.
(Definition #5.)
http://www.dict.org/bin/Dict?Form=Dict2&Database=*&Query=eng...
Much of modern economics underplays this at best. The Libertarian favourite, Henry Hazlitt's Economics in One Lesson, fails to mention the matter of monopolies at all.
https://www.mises.org/library/economics-one-lesson
Sometimes it's the censorship and deletions that tell you most of what an organisation or ideology is concerned with.
3 business owners are in a communist jail. That ask each other what they are in for.
Person 1: "I set my prices lower than my competitors, and got sent to jail for price dumping!"
Person 2 "I set my prices higher than my competitors and got sent to jail for price gouging!"
Person 3 "I set my prices to be the same as my competitors and got set to jail for price fixing!"
It has been almost 20 years since Amazon got started. When are those mythical monopoly price increases coming?
I bet that in another 20 years people are going to be saying the same argument about price dumping or whatever.
They are not.
But the "promise" that they are, or could, inflates Amazon's stock price.
This is how they bank profit, not by traditional profit on income. This has the advantage that they don't need to pay tax, since they don't make any accounting profit.
If prices forever stay low, then consumers ALWAYS benefit, right?
You are making a different argument than the one that the article makes, FYI.
http://www.latimes.com/books/jacketcopy/la-et-jc-amazon-and-...
The focus on price, alone, is a distraction. The monopolist can choose winners and losers, favour or exclude sellers or buyers, unilaterally determine and dictate dispute resolution (e.g., Amazon's purchase dispute process), in favour of buyers, or sellers, or parties specified on other bases.
Or as comms providers have done in the past, and it is feared they might do if network neutrality obligations are lifted, as the FCC are attempting to ram through presently.
The monopolist isn't answerable to the public or citizenry, as a government body is.
A monopoly market is not a competitive market, with many buyers and sellers, to which any given buyer or seller has a recourse should one counterparty decline business or terms.
A monopolist creates a situation of rents, by controlling and regulating supply. This allows for price inflation if demand can then be influenced, much as is the case with land.
That's just off the top of my head. Any further questions?
But my argument is that there must be provable consumer harm, and that consumers are the only thing that matters.
So all those bad things that you mentioned, do they hurt consumers AND is Amazon actually doing them? That is the only thing that matters, and would be the thing that should be determined by whatever court case happens.
There may be highly probable harms which cannot be directly proven, or for which various standards of proof are thwarted by the monopolist itself. Since "wealth is power" (Thomas Hobbes, Adam Smith), monopoly power itself conveys additional power. There's a strong argument for additional responsbility, limits, and/or oversight as a result, for which there's a long list of supporting argument (Smith, Mill, Marx, Galbraith, off the top of my head).
Secondly, consumers are only one of several parties potentially affected. The other groups may be competitors, suppliers, vendors, the public at large, natural systems, etc. I'd have to think over this at greater length.
The argument that price and "consumers" are the only factors of significance in considering monopoly harms is a distinctly modern one, promulgated almost exclusively by monopolists themselves. To rather great effect.
After all, wealth is power.
Not necessarily. The system is much more complex than simply "low prices = good".
Markets are an ecosystem, if you allow one retailer to dominate, they will exert control. That could be by hiking prices, or it could be by picking favorites among their suppliers, deciding which products are "suitable" and so on, and by squeezing suppliers, possibly to the point where the result is stagnating quality and innovation, as suppliers race to the bottom on price alone.
Quite apart from consumer political issues of having such a dominant presence in the market. Eg, if they refuse to serve you for whatever reason (or serve you badly, perhaps with "custom" pricing), you are disadvantaged.
The consumer ultimately loses in this long game, and it should go without saying that enabling a monopolist, even one with low prices and supposedly a focus on "customer satisfaction" (though is that merely a vector for dominance?), is likely to end badly.
They're already here! Over the last few years Amazon has become notorious for the level of counterfeit goods making their way through their storefront - including Prime[1]. With moves like mixing supposedly identical goods from different sellers in their distribution centres, Amazon seems to be indicating that they don't really care about this problem - regardless of how much lip service they pay it. In effect, they're getting some percentage of their customers to accept inferior goods for similar prices. I don't think they could get away with it if they had robust competition in online retail.
[1] https://www.cnbc.com/2016/07/08/amazons-chinese-counterfeit-...
The whole thing needs to be understood by looking at how things actually started. Let's take the example of Uber. People weren't happy with the way taxi services were operating so it was ripe for "disruption". But, getting into a stranger's car for a ride was not really a solution.
So Uber had to create a two way market - entice people to offer their cars and entice people to take a stranger's car. They also had to offer up incentives on both sides of the market to ensure participation - offer drivers with perks and higher payouts while the riders got cheap pricing. Once the market was established and verified they had to find a way to make money. The only problem was riders or customers could not be inconvenienced, at least a lot. So, now the drivers had to bear the brunt.
But, this will lead to some unintended consequences. An example is that instead of trying to charge customers fairly Uber uses "surge pricing" - so much so that there are place which are mulling to ban this practice. Then there are cases of drivers trying to defraud riders too. This invariably causes lowered customer experience.
1. I increase the nominal price 2. I decrease the amount I give you 3. I lower the quality of what I give you.
So all the comments that state: "There's no observed increase in price by [insert monopolist]" have to also assert that points 2 and 3 didn't occur.
If I sell you a chocolate bar and I start using food grade wax in increasing quantities I'm effectively increasing the price of chocolate (and recreating Hershey's ;).
So, if I can't reliably buy genuine batteries (or much of anything really) with Amazon and I have to choose between them and Costco, then Amazon's are effectively more expensive.
Not saying amazon is or isn't awesome... but they have been jacking their prices!
In truth, people will always complain about something when you are successful. This probably means Amazon is doing something right.
Imagine if you're trying to sell lemonade on the street at a reasonable price, and the rich kid down the block sells at 50% the cost of goods. And all that just being funded by their dad.
At one point they're going to be the only lemonade salesperson on the block, and those subsidies are probably going to end. Meanwhile a market was up-ended and everyone who isn't the "winner" ends up losing.
Short term, customers are happy because someone is just giving them free money! But in the end it's not sustainable.
If we think we should let VCs subsidize services, we can just cut out the middlemen and tax their money away instead of playing these kinds of games.
If the loss-leading is unsustainable then it hardly needs to be discouraged, and if it's sustainable it's not really loss-leading. (If it's funded by some other venture with higher margins, like AWS, other players can compete in that market without the albatross of having to maintain the cross-subsidies.)
I have to disagree, creating a monopoly is part of the capitalistic process of creating profits in the long term and I would say it’s one of the aims of capitalism itself: when you compete do you want as many competitors as possible? It could be for some reasons but it certainly can be the opposite for more reasons as well.
While I do agree that this may have some negative consequences for customers, I can’t understand how they would legislate this:
If they keep with this strategy they either fail (or just crash very hard) for not having a scalable business or they prosper in some way, let’s say by increasing prices: if they prosper the only thing we could do is making sure that customers can access more convenient offers elsewhere.
That’s why I think having transparent and accessible information is truly enforcing meritocracy, while preventing monopolies is not
Once they succeed, there isn't a viable "elsewhere" left.
...Thus dooming themselves to be, if nothing else, undercut by their own previous strategies.
Uber burns cash like pretty much any funded startup but there's nothing in the article suggesting their unit economics are flawed. Is the author really suggesting that competition law should force companies like Uber to set their price higher than the competition?
It's called disruption for a reason.
How is that clear? Have you researched this author and established that they have ties to competitors, or are you just flinging poo with no justification at all?
> Uber burns cash like pretty much any funded startup
See the title of the article: Big tech is built on predatory pricing