ESSA

ESSA

Uber is problematic – but you’ll keep using it anyway


Justin Liu

By

March 1st, 2017


Uber is practically a staple of modern transport, but its meteoric rise has come at a cost.


Since Uber’s inception in 2012, many people have taken a ride in an Uber car or at least understand the principles behind the popular ride-sharing service. For the unaware, Uber works by facilitating a transaction between someone who is able to drive someone else around and someone who is willing to pay for that privilege. Compared to traditional taxis, which are frequently derided as inefficient, slow, and just generally unpleasant, proponents of Uber have heralded the service’s introduction as the zenith of free market machinations.

In short, Uber (at least to the average consumer) functions much like a taxi service. In practice though, the similarities end there. Unlike a traditional taxi service, Uber operates without directly employing any drivers, as well as not even having a fleet of cars to operate. Instead, drivers sign up to be contractors with Uber, and essentially become on-demand employees for the company. While the basic premise of Uber remains simple, the concept becomes more complex when demand and supply misalign.

People who have undergone the misfortune of hailing an Uber ride during busy peak periods (such as late nights or public holidays) have probably experienced Uber’s “surge pricing.” This occurs when demand for rides rises, leading to an increase in price. Because Uber drivers have flexibility in deciding the hours they drive, the higher prices increases incentives for Uber drivers to provide more services. In this sense, surge pricing is indicative of how changes in demand and supply influence each other.

When viewed through the lens of an economic textbook, this is to be expected, and even encouraged as a sign of a healthy market. However, in their quest to distill everything to a probability, economic models fail to account for social and moral norms. An example where this has gone wrong is during the Sydney hostage crisis in 2014, where Uber’s surge pricing algorithms kicked in and begun charging people 4x the normal rate to exit the city. A ride from the general area of the incident to Sydney’s airport cost around $150, where it would normally cost around $30. For you and me, I’m sure we would rather ensure we made it out of the city alive; rather than concern ourselves with the economic intuition behind Uber’s pricing models. Uber subsequently made all rides in the Sydney area free and refunded those who paid for rides. This is a vivid example of where the unfettered free market produces undesirable outcomes.

Proponents of Uber generally of draw attention to the fact Uber is not the only supplier of transportation services. Public transport, private car ownership and taxis are all substitutes for an Uber ride. This means that people are not locked into using Uber and therefore have no right to complain about Uber’s pricing or operation model. However, Uber’s relative ease of use and attractive pricing structure makes it a more desirable choice.

A comparison between taxis and Uber demonstrates this is the case. High fares, being rejected for short rides, absurd card fees and unreliable booking systems are all hallmarks of our taxis; of which Uber suffers from none. The reason behind the relative unattractiveness of taxis is primarily the product of overregulation. Taxis are unable to adjust fares in response to changes in supply and demand and as a result, have to charge higher average fares. Taxis must also obtain taxi licenses (costing over $200,000), must obtain specialised insurance, undergo specific training, all of which is incorporated into the cost of a taxi fare. Compared to Uber, where anyone with a driver’s license and a relatively new car can start driving and making money, it can appear that taxis are unfairly hobbled by regulation, while Uber is able to circumvent these regulations and operate much more flexibly, and at a lower cost.

There are other serious shortcomings to Uber. Drivers for Uber are not necessarily better off either compared to taxi drivers. Though Uber likes to position itself as the free market in action, in reality, Uber acts as a monopsony (a single purchaser for all goods and services) and “purchases” all trips from drivers, before supplying them to riders. Progressive fare cuts being rolled out by Uber are designed to reduce the amount that consumers pay for rides, but drivers ultimately bear the cost in the form of reduced fare receipts. Because Uber’s model requires that drivers provide their own car, these fare cuts are simply additional burdens on top of other costs, such as fuel and maintenance. Because Uber is a monopsony, drivers don’t really have much choice as to whom they sell their services to. A car rolling up to someone on the street and inviting them to purchase a ride is unlikely to be as popular as Uber. Given the lack of viable alternative ridesharing services in Australia, the choice for drivers is to work under the platform with all its constraints, or to no longer take fares.

As a consumer, Uber definitely represents a boon to people who use transportation services. Cheaper prices, better platforms and higher quality services make it obvious why consumers have flocked to Uber over conventional taxi services. However, next time you pull out your phone to call an Uber, consider everything that happens behind the scenes. The economics behind the platform, the regulations that may or may not have been ignored, and how much your driver is actually putting in their pocket once everyone has taken their share.

 

We hope you enjoyed this ESSA Article and our 2017 O-Week festivities! Are you a Monash university student with an interest in economics? Learn how you can join our publications team here: http://bit.ly/2mhxQjK

 

Main image source: https://www.flickr.com/photos/senatormarkwarner/19588717540

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

Founding sponsors

 

 

Partner

Gold sponsors

 

Silver sponsors

 

 

 

 


Affiliates