Uber Cuts Fares in 48 Cities, Raising Some Concern Among Drivers
bits.blogs.nytimes.com
bits.blogs.nytimes.com
One of the first questions is to ask about a business is whether there are any barriers to competition. In the case of Uber or Lyft, they have network effects but the drivers themselves have no barrier.
Years ago some Subway franchisees sued Subway because they were selling franchises right across the street from existing franchises. Same issue. There will always be more drivers, Uber/Lyft control the rate, so no limit to how far drivers can be squeezed.
In a great twist of irony I'm sure we'll soon see Uber lean on regulations to protect their foothold as that will eventually be their only competitive advantage.
The only way this doesn't happen is if drivers gain regulatory or bargaining power in the duopoly. And if that happens a startup will come along, adopt self-driving cars and eat the duopoly's lunch.
To survive, they have to stay unencumbered by regulation that would get in the way of replacing drivers.
Taxi drivers never made a lot of money, even in the old system. But at least the system protected them to a degree by limiting competition. Now there is no protection. It's a free market. Anyone with a Toyota Yaris can fire up Uber-X and compete during the busy couple of hours of the night. It will be a race to the bottom for driver incomes, for sure.
There's also no reason to presuppose that personal transportation SHOULD provide a livelihood. The goal of companies like Uber/Lyft is to take advantage of the currently wasted extra carrying capacity in personal vehicles. There's no reason to expect a priori that the value of extra capacity is enough to provide an income.
The goal of these companies is to provide cheaper transportation to those without cars, not to provide a living for those with cars. If less money overall is spent on transportation (which is >90% means to an end, excepting joyriding and competition), which is the case when currently excess capacity is utilized, and consumers also spend less (and consequently capital tied up in personal vehicles), then more capital and income is available for other goods and services.
Obviously, any major paradigm shift in the provision of a good or service will cause some level of upset for those accustomed to the current paradigm, but that does not make the shift a negative one. Further, attempts to ease the transition only draw out the period where we operate in a lossy manner.
In another manner of speaking, when I heard of Uber and Lyft, I did not think that I could quit my day job since I have a car, nor would I have decided to go buy a car if I didn't have one for the purpose of earning income. I did think that they could be a valuable way to defray a portion of my already sunk cost of owning a vehicle. If I hadn't owned a vehicle, these services may have lowered the marginal cost of acquiring a vehicle enough that I could now reasonably afford one.
In both of the above lines of reasoning (currently owning or deciding to purchase), they are not a means of supporting myself, but a means of sharing some of my costs with others who are willing to pay. A car still costs money, but by renting space in it, I can lower the cost.
Think of it more akin to AirBnB - if I own an apartment with an extra room, I don't expect to pay my whole rent with AirBnB-ing out the extra room, but I certainly expect to pay part of my rent out of it. The only difference is that Uber/Lyft rent room in a car.
But the $1500 rent real taxis pay to medallion holders is now going to Uber. This disruption really just replaced one middleman with another and switched to a per-ride model instead of flat rate monthly.
The increased insurance cost (I heard it was double normal insurance rates) will go away, since most people will not tell their insurance companies they are using their car for business. That means insurance rates will go up for all of us over time as accident and claim rates go up.
All I'm saying, I guess, is it will clearly lead to a reduction in driver incomes overall. I can't see how this business model can lead to them making more. The average wage will be below minimum wage, because how can it not be?
In this case taxi service need not be supplied by full-time taxi drivers, which is a central point to most of my thinking on this matter. Taxi service can be provided in any quantity (subject to the limits of time and space, obviously) by any individual with a car. A person may provide taxi service once in their life or dozens of times a day.
Second, I will refer to Uber below for simplicity, but I intend my argument to apply to all similar services that exist (Lyft so far as I know) and may come into existence as competitors.
In the status quo the number of medallions is a rough approximation of the limit of taxi services. I think we can agree that the current number of medallions currently limits the supply of taxi services (the supply curve is shifting toward the origin because cost of entry is higher than in the complete absence of medallions or equivalents), and therefore raises the equilibrium price of taxi services. Currently the medallion represents an economic rent (regardless of who owns the medallion a rent is being collected).
In the future state (this is a very general future state - anything where the current limit imposed by medallions is weakened or removed entirely and at least some of the rent that exists in the status quo is transformed into revenue for Uber) the situation is improved. The revenue collected by Uber is not an economic rent, but rather a transactional cost.
First, the cost structure is different - a transactional cost is marginal, whereas the medallion rent (this is specific to a medallion, not all economic rents in general) is either not marginal or marginal at a much coarser granularity. If I rent a medallion on a monthly basis, then I am deciding whether it is worth it to me to drive a taxi for another month. With a transactional cost, I decide whether it is worth it to me to provide one more trip of taxi service. This allows someone who might just pick up people on their normal commute (this is just an example that I find easy to discuss, not the entire basis of my argument) to provide taxi service. Right here we see an increase in supply of taxi services. Our first order analysis should lead us to expect that this increased supply should lead to downward pressure on the cost of taxi service.
Second, the transactional cost is incurred by a competitive firm (currently one competitor in Lyft (that I know of), but even nonexistent competitors can provide pressure[0]). If a competitor can provide a similar service to Uber (matching willing drivers to willing passengers) at a lower cost, then the transactional cost will be driven downward and since there is clear competition in this case among drivers, the cost to end users will ultimately be driven down[1]. In this case, even if we accept your equivalence of Uber's profits and the current economic rent of medallions (note: I do not accept this equivalence, which I think the rest of my post makes clear) the $/ride of this money will decrease, resulting in a net gain.
I have not yet addressed your points about insurance, but first I would like to conclude my current line of reasoning by addressing your fourth paragraph.
You discuss driver incomes and wages, with a comparison to minimum wage. I do not believe the connotation of these terms is in alignment with what is made possible by the service Uber offers in matching casual drivers with occupants. I believe the innovation of Uber is just a re-realization (with some obvious improvements) of the jitney service of the early 1900s. I discuss this concept in more detail in another post[2] with a link to a very interesting history of the trend[3]. In brief summary, ride-sharing is a distributed casual endeavor. A useful metaphor may be Folding@Home - a service that utilizes excess capacity of capital with a significant sunk cost component. I do not think it is accurate to talk about someone's income or wage for something that is not their job. It is not strictly false to do so, since the terms are technically general, but they carry the connotation of employment and I do not think we face a model of employment. We don't talk about someone's wage when they host AirBnB guests. We do not talk about the average person's Craigslist furniture income. My position is that we should view ride-share as analogous to these two examples, rather than as analogous to the current status quo of taxi driver as occupation.
Finally, with regards to insurance, Uber provides insurance to its drivers which is primary to their personal auto insurance[4]. I do not believe your statements regarding insurance are factual or I am misunderstanding your reasoning. I would also like to understand why you expect accident rates and insurance claims to increase. I can think of numerous lines of reasoning, but I'd like to understand yours.
[0] Pressure from potential entrants can force a firm to act as if it had competitors. This idea is not strictly necessary for my argument, so I have removed its exposition. Even if you do not accept this line of reasoning my argument stands since there is no clear monopoly in providing services similar to Uber. So long as a competitor may enter a market, an incumbent firm faces competitive pressure. To wit, if Uber were the only firm in the market, there is currently no large barrier preventing a competitor from creating a similar service and offering a lower price. (There are costs to entry which provide some barrier, but cost of entry does not prevent all competition - there is a nuance that I'll not delve into here about capturing monopoly rents in proportion to the natural cost of entry to the market - it alters but does not destroy the line of reasoning presented.) If Uber wishes to maintain its singular position in market, it cannot sustain monopoly pricing. To do so, it would have to restrict its own supply to raise prices. Since prices would be above equilibrium, competitors would have incentive to enter the market an collect a portion of that monopoly rent. Upon entry of a competitor, we naturally see competitive behavior. If Uber wishes to maintain its singular market position, it must act as if it has competitors, else it will gain competitors. This process would keep prices in line. Monopoly rents are only regularly collected by regulated industries. We could argue causality there, but that is a different conversation and this post is plenty long.
[1] I suggest that competition among drivers would lower the price to consumers. This is not exactly true, since as we both know Uber sets the price, collects the payment, and pays the driver. What I actually mean is that since in the future state there is no artificial limit on the number of drivers, the natural consequence is for price to consumers to fall. Uber wants more customers, so they will lower the cost to their customers. There is an equilibrium to be found among driver remuneration and customer cost. I think we both agree that the trend would be downward for driver pay.
[2] https://news.ycombinator.com/item?id=8875663
[3] http://www.jstor.org/discover/724795?sid=21105612783593&uid=...
I don't buy it. Uber flies the flag of "the sharing economy" but their requirements for the car and the drivers make it look way more like a professional car service than an opportunity to share rides if you have a car.
Please let me know if [1] is not an accurate representation of requirements for non-commercial drivers.
We may be focusing on different segments. To me, the commercial version is just a taxi-hailing service with a custom pricing model. This is not too innovative - just a convenience application on top of existing services.
What I consider the innovative portion, and the (I will admit unclear in my prior posts) focus of my argument, is the non-commercial service.
[0]https://get.uber.com/drive/
[1]http://www.ridesharingdriver.com/uber-driver-requirements-qu...
It's not Uber's goal to make it so you can live off of Uber. It's to provide people with extra money the side. Does this hurt the livelihood of regular taxi company drivers in the long run? Of coarse. But with so many cars on the road, maybe it's an outdated occupation.
It is a useful case study in regulation used anti-competitively, and the misaligned interests between consumers (those wanting cheap convenient transport) and the incumbent services backed by municipalities (those wanting monopoly rents and the tax income from it). These arguments hold parallels to many infrastructure and service provider debates we see today (heck we even come across the term common carrier in the article).
There were, of course, valid objections at the time, and there are today. Many of the same ones are repeated in the article.
The most interesting part to me, though, is the several page exposition (295-303) on the characteristics of jitney transportation. It is clear that in its natural form, ride-sharing does not lend itself to long-term full time employment. Some anecdotes from the article are a doctor who keeps a car for house calls allowing his son to use the car (sunk cost) as a jitney; the commuters who post their destination and only pick up passengers on their way to/from work; and those individuals who supplement their income with several hours a week of jitney work.
This article supports my original comment (the grandparent) and the parent here that Uber/Lyft should not be viewed as traditional employers.
I would alter the quote below to indicate that taxi driver as an occupation was never an occupation until regulation in the interest of a more lucrative (for the incumbent firms and for the municipalities they operated in) business forced an artificial constriction in the market for public transport.
>But with so many cars on the road, maybe it's an outdated occupation
[0]http://www.jstor.org/discover/724795?sid=21105612783593&uid=...
So gas price seems like a red herring to me.
The car services are already such an improvement (in terms of technology) over taxi services that I'm happy to pay for the convenience. And I'm getting less and less enthusiastic about funding a race to the bottom, nevermind the impact it has on customer service.
Interesting. My girlfriend gets upset with me because I always tip. Generously, regardless of the level of service. I also empty my wallet of coins and give it to the first person asking for change. That's driven entirely by knowing that by earning over $100k you're in the top 1% of earners on the planet (median world-wide income is just $10k).
They really do need to replace casual car use/ownership, but I think rather than continually drop effective wages for their drivers, they need to focus on how good a deal it already is. (compare to mileage on your car, fuel, parking time, parking cost, Parking location)
And you're paying the fuel and milage costs any way you look at it (in fact, you're paying for more fuel/milage, since the driver has to drive to you). I don't understand why this error constantly crops up -- surely everyone understands that car fairies don't come down from the sky and put gasoline into the tanks of UberX cars. You're the one paying for the ride, so you're paying for the gas. The fact that you aren't physically present when the gas gets put into the tank of the car has no effect on it.
You're cutting out certain sources of overhead but introducing others, specifically a driver and the organization managing that driver. Uber has to find a way to cut costs to the bone because humans are more expensive than machines and resources and that's not going to change anytime soon.
It's even worse for commuting, because you'd have to be working for a real a-hole if you're paying parking fees at work. Uber estimates that it costs $16-22 one way for my commute. $32-40 is pretty steep to get to and from work.
They have a long way to go before I'd be able to replace my car with Uber.
It depends. It's pretty common in a large city not to have parking included. (And, in fact, I know of at least one city that doesn't allow employers to provide free parking.)
But your basic point is entirely correct. Driving or taking commuter rail into a large city may cost $20 per day or so but then Uber/taxi is going to cost more as well. For the vast majority of people, you can't replace a personal car with a taxi for anything like the same price. It's only practical at the margins; i.e. you only marginally need a car anyway.
The disaffected professionals are probably the ones who bitch and gripe about money compared to the old days. Uber is now trying to swallow up huge amounts of market share by creating mammoth demand which will presumably lead to more drivers (who haven't been weaned on better-paying services).
You're dealing with humans here and nobody wants to work twice as hard for the same amount of money or very slightly more.
So what happens is that the quality slips and good drivers will go where there's more money to be earned easily.
There's a limit to how low you can drive the prices before the good contractors start ditching the ship.
I foresee bad things in Uber's future.
Yes, there is competition for drivers and drivers influence quality. Honestly, I think that the only way these two players survive is to stratify their services: high end with good drivers vs. the college kid with a junker full of empty pizza boxes.
The goal of Uber is to earn money by allowing utilization of the massive unused transportation capacity bound up in personal vehicles.
As detailed in a child post of the linked thread, taxi-driving was not a long-term full time opportunity until many regulations (supported primarily by trolley/streetcar incumbents who could not compete with jitney service and by municipalities who could more readily collect fees/taxes from those incumbents than the jitney ecosystem) forced huge scarcity in the provision of point-to-point on-demand transport.
Disclaimer: I am not claiming all was perfect, and the thread linked indicates several of the negatives, and the article[1] referenced in the other thread goes into more detail. The argument is that transportation need not be a full-time job; there is sufficient excess capacity that the primary benefit of Uber/Lyft comes not from providing a new livelihood, but in destroying a large source of deadweight loss (large sunk costs in personal vehicles with often-superfluous carrying capacity).
[0]https://news.ycombinator.com/item?id=8875039 [1]http://www.jstor.org/discover/724795?sid=21105612783593&uid=...
> To reassure drivers worried about lower fares, Uber said it would guarantee a minimum fare per hour for drivers in these cities.
$12/hr is okay pay for sitting in a parked car, but it's below minimum wage if you drive more than about 8 miles per hour, and below no wage if you drive more than about 21.
It might seem a long way off or even fantasy to some, but carving out a dominant market-share now will mean big profits if/once drivers are eliminated from the equation.
That, or create another service tier like Uber XL but for better cars instead of bigger cars.
Many, many times I have ordered a regular "black car", and been picked up by a big SUV (Escalade or Suburban). Likewise, a lot of times I have ordered Uber X and been picked up by a luxury car and sometimes an SUV (Audi Q5, etc).
Uber rides to downtown back to my house ~$100-150, Taxi ~$75-125, MARTA/Taxi combo ~$40-75. I hope to see the prices decrease for Uber.
The things that Uber really has going for it that I absolutely hate about Taxis are getting the price up front and knowing when the driver is going to be there. Taxi's will never update you to say if they are coming or not and many times I have been left out in the cold waiting for taxis that never comes.
The station I go to usually has 1 or 2 taxis waiting so I haven't needed an Uber.
Good Suggestion!
I understand that you mean to say that you expect the quality of Uber rides to drop, but can you do so in a way that doesn't draw upon negative stereotypes of other ethnicities?
I'm surprised more cities don't ban cell phone use by the drivers. It's the single thing I hate most about NYC cabs.
Besides the obvious boredom-killing, I've also heard of it being used as a safety feature. It wasn't that long ago that drivers would be robbed or assaulted (heck, an UberX driver here was just robbed a few weeks ago).
EDIT: Next time perhaps report your cabbie?
We were in New Orleans last week, and took a dozen cabs, and not a single driver talked on their phone. Shows the importance of enforcing regulations.
Rather than the bait and switch, why not just raise the price rather than feign at lowering it? Kill the lie that the Surge Pricing brand has become. Just be honest.
I don't see any reason to see surge pricing as "bait and switch," although I'd be open to seeing some actual data that backs this up.
It will be interesting to see what happens next.