Uber Economics

Uber Introduction
Privately owned multinational online transportation
network company.
Founded in 2009 in San Francisco, California.

[1]

1mm rides per day across almost 300 cities globally.

The company adds ~50 new drivers each month.

[2]

Not yet profitable (MES?)

Source: Uber.com

The Market - An Economic Perspective

Two sets of users (Riders and Drivers), two-sided market/network.
Economic platform connecting suppliers and buyers of on-demand car
transportation
Two-sided marketplaces face three classic problems[5]:
1) Creating Demand.
2) Creating Supply.
3) Maximizing matches between suppliers and buyers.

Value add and success driven by matching supply and demand more efficiently

Restricting Supply and Long- Run Economic

Profits

Taxicab Medallions - Securitization

Max amount a leased cab can make in a year - $82,524

Cost of vehicle assumption - $27,000

Assume net cash flow to medallion is ~$50,000 or a 5.0% return per

annum

Value of a $50,000 perpetuity

At 5.0% = $1,000,000

Oligopoly Like Market Characteristics

Small number of firms constitute most of the industry
Major: Uber, Lyft, Traditional Taxi, Radio Dispatched Car and Limo Services
Minor: Sidecar
Substitutes: Subways/Rail, Buses, Rental Cars
Barriers to Entry

Creating Demand

Creating Supply

Competitive technology and know-how barriers regarding matching, logistics and pricing
algorithms and technology.

Economics of Uber Pricing

Uber Fare = Vehicle Type + City Base Fare + Time + Distance
Driver/Uber = 80/20
Low Price Leader
Surge Pricing = Weekend Nights + Holidays (10% of Uber Trips)

Surge Pricing

Surge Pricing
Increase in Demand during peak,
D shift to D1
At current P*, results in shortage

Surge Pricing
Uber increases fare, P* to new
P**
More drivers, movement along S
D1 passengers fulfilled

(equilibrium)

After surge, back to P* and Q*

Economic Efficiency
Uber is improving economic efficiency in several ways:
Medallion system = quasi-monopoly = market failure
Uber better matches supply with demand, reducing deadweight loss
Satisfying greater quantity demanded at lower clearing price
Reduces Externalities

P
Taxi

ve
titi R
e
m p UB E
o
C
=
S ( rket
Ma
LT)

S (Regulated
Medallion)
Inelastic Supply Curve

P*

Efficient
Market
Equilibrium
Deadweight
Loss (Taxi)

Q -Taxi

Q*

e
tiv
eti ER
p
m
UB
Co
S ( rket =
Ma
LT)

P
Efficient
Market
Equilibrium
P*
Surge
P
P*Taxi
(old)

Su D rge

Deadweight Loss Grows

to Include Lighter Blue
(Taxi assumes no peak
fare; Dark Blue is Old DWL)

Q -Taxi Q*
(old)

Not to scale

D(
Q* Surge

old
)

Reduces Negative Externalities

For Example
Reduced congestion/pollution via fewer cars driving idly in search of
riders

Fewer deaths from intoxicated driving due to reasonably priced

alternatives (small market)

Negative Externality
(E.g., Pollution) of Free
Market Hailing (Taxi)
Reduced by Medallion
Limit

P
Taxi

S (Regulated
Medallion)
Price CA

MS

e
ti v R
i
t
pe B E
om = U
C
S ( rket
Ma
LT)

P*

Efficient
Market
Equilibrium

Q -Taxi

Q*

Negative Externality
(Pollution) of Free
Market Hailing Option
Then Reduced by Ubers
on demand service (Not
driving around seeking
customers)

P
Taxi

C
MS

ve
titi R
e
BE
mp
Co t = U
(
S rk e
Ma
LT)

MS
On B (On
T im
D
e) ema
n

P*

Efficient
Market
Equilibrium

d,

D
Q -Taxi

Q*

Monopolizing Power

"I do have concerns about Uber becoming a monopoly. Steve Wozniak

Uber has advantage from being the first-mover and network effects
To monopolize, Uber would have to increase barriers to entry:
Keep building Sophisticated Pricing System and
Application Technology
Continue to competitively price
Increase advertising
Attract best drivers
Take over Major Cities
Increase economies of scope (ex. UberEATS and UBERrush)

Low Barriers to Entry

Growth Trends vs. Competitors

Lyft

"Everywhere we are, we have got competition. Passengers can switch

to another ride-sharing provider by switching to a different app any time
of the day, and so can drivers We are in a competitive market here
and around the world." - Uber Australia GM

Monopolizing Power

Historically, for-hire vehicle transport has

been regulated to the point of suppressed
competition.
Lack of competition led to a decline in
taxi customer service. Increased
competition through ride-sharing has
forced taxis to improve their service.
Uber is breaking up the governmentenforced monopoly and the industry will
continue towards perfect competition as
more companies enter the marketplace
and regulations adapt.

Global regulatory landscape

Taxicab Regulation Key areas

Area of
Regulation

Issues
Addressed

Inefficiencies posed

Entry

Congestion and pollution

Protect drivers ability to earn
profits in the long-run

Absolute cost barrier medallion

Fares

Encourage use of public transit.

Reduce transaction costs if drivers
and riders are able to bargain.

Deadweight loss

Service Availability

Consumer protection - provide

service to all customers within
designated areas.

Short of supply

Quality/Reliability

Full time taxi service provider

adequately insured and screened

Information asymmetry

What Uber brings to the industry

Minimize deadweight loss

Encourage more
competition

Reduct transaction costs

Diminish asymmetric

Scott Wallsten (2015), The Competitive effect of the Sharing

Economy: How is Uber Changing Taxis?.

information

Regulatory proposal and challenges

Licensing requirements

Pricing concern

Service area requirement