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.