29 Sep 2014

Uber going under?

Raven H. writes:*

Uber is often viewed as a cheap platform for ridesharing. Uber started as a response to increasingly high taxi prices. The taxi market had little to no entry. To be a legal taxi driver you have to have a license, also called a ‘taxi medallion’. In 2013, a pair of medallions was auctioned for $2.5 million. Not everyone can afford this, which makes entry barrier for the market really high. It is Uber’s goal to assist individuals who aren’t able to afford this. Drivers only need a driver’s license, an Uber-approved car, which implies it has to tick certain boxes (e.g. right age, size, brand, insurance etc.) and via an app they are linked to thousands of customers. Which makes Uber the middleman that connects demand and supply.

Without Uber there was relative inelasticity, which means that taxi drivers can increase the price without losing many customers, because people do not have many other options (monopoly). These things are the reason that taxi drivers can increase their rates greatly. They do this in order to maximize their profits. Consumers are therefore disadvantaged by the monopoly.

Uber is currently breaking the taxi monopoly. They do this by seducing customers with their low fare rates. However, during times that the demand is high Uber increases fares. They do this to attract more drivers (supply) and so they reach equilibrium. This is because drivers react to higher prices, as they will have a bigger incentive to work. As a consequence, more people can get a cab, albeit for a higher price. Nevertheless, Uber is still a cheaper option in comparison to a regular taxi because the profit margin for the driver is lower and taxi drivers keep the prices up so they can have more profit. This is also why some taxi drivers make a detour, which is not transparent.

Last week, the conservative taxi world fought back. They brought out their own app, and chanted that Uber was unfair competition and an illegal, unsafe practice. In Germany and France, Uber is already prohibited. It is illegal because anyone who’s over 21 and has driver’s license can be a taxi driver. This is, according to judges in France and Germany, unsafe. Nevertheless, Uber is still active in over 40 countries and is still expanding. Their low prices still attract many consumers.

Bottom Line: Uber has reached its peak and cab drivers are fighting back. Although prohibited in Germany and France, Uber is still effective and used because of the low prices and transparency of prices causes consumers to choose Uber over conventional taxis.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.


RM said...

This week’s IGM Economic Experts Panel statement: "Letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare."

Jente Althuis said...

While I agree with your point that Uber strongly affects the taxi market by offering much lower fare rates, I am not immediately convinced by the argument you make about the inelasticity of the taxi market due to it being a monopoly.

Taking a taxi is only one of the several options of transport that are available. Especially in more densely populated areas several other types of transport are available (train, bus, bike, by foot, etc.) Therefore, there is a large amount of substitute goods on the transport market, which decreases taxi driver's ability to increase prices without losing customers, who would switch to other types of transport.

Even though the taxi market in for example New York could indeed be considered a monopoly and has power to set the prices, I would argue that your statement that the taxi market is relatively inelastic is too strong. This does, of course, not change the fact that Uber entering the market strongly affects (and decreases) the market power that existing taxi companies have.

Ezra Schlueter said...

Very interesting choice of topic, since Uber might have the ability to officially break a standing monopoly in some places of the world. It is without a doubt difficult to judge, whether Uber is able to guarantee safety standards similar to those of licensed taxis. I believe, however, that the concept unveils the shortcomings of the current taxi market in many countries. As you pointed out the taxi system can be considered one of the existing monopolies that has the ability to increase prices with very little changes in demand. The customer does (in countries where Uber is active) and would (in places like Germany or France) benefit from competition within the taxi market, because it would regulate the prices. Uber is just one attempt to influence the taxi prices while being profitable at the same time. The court's decisions in France and Germany are understandable since they focus on the passenger safety rather than the protection of the taxi monopoly. Those countries as well as all the countries where Uber is successfully operating should rethink their legislation regarding the taxi system. The fact that two major German cities increased their taxi fares only days after Uber was prohibited in Germany shows that a lack of competition puts the customer in a disadvantaged position. I believe that they would have thought long and hard about increasing prices if Uber was operating in their cities and competing for customers.

Margot M said...

Uber as you pointed out is breaking down the conventional barriers to entry of the taxi "monopoly". Although this degree of market power depends on the city in question, non-Uber taxi drivers formerly protected by strict regulations definitely have cause for alarm. Your post got me to think further about this new age of "free exchange", in which companies like Airbnb and Uber are revolutionizing markets, but also skipping requirements their main competitors are required to meet. This Uber debate thus falls under the greater question of "the sharing economy" and whether it will be a trend or if it will ultimately become imbedded in our culture as a disruptive innovation. Some questions I am left with: how can we effectively regulate and tax these new industries whilst still allowing for real innovation? Furthermore, is it justifiable to hold suppliers of Airbnb and Uber to different standards than their conventional competitors (hotels and taxis)? How may policies change in the future?
Three links I found particularly helpful/intriguing:

Felix B said...

Whereas Uber might have the ability to break the taxi monopoly (whether that is inelastic or not), it is also interesting to look at barriers to enter into Uber´s own industry. Uber has recently been valued at $ 18.2 billion; yet competitors might find it easy to take away business from Uber and ultimately limit Uber´s size and market power. The driver themselves are driven by price and do not have a specific loyalty to Uber. Already now the market faces increasing competition with companies such as Lyft or Flywheel entering the market. Furthermore the market Uber is in is not a service market that the Taxi industry might be. In simply linking demand and supply Uber´s service becomes a commodity, signified by low possible differentiation amongst suppliers. In addition, Uber does not own anything except its app. Hence Uber will always operate in and be part of a bigger marketplace – transportation – in which drivers and passengers may go for an Uber competitor at any point. Uber probably has thought of strategies to differentiate themselves from competitors and dominate the market. The essential question is whether the market of bringing passengers from one point to the other allows for one supplier (Uber) to capture a very large share of the rewards. In this manner, competition and low barriers to enter the market may lead to price wars amongst competitors and result in a progressive and dynamic market of ride sharing. Uber as the first-mover might have unrealistic ideas of its market size, and potential revenues.

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