Naive Ubernomics

If we go by the adage, there is no such thing as bad publicity, then Uber got media exposure in India in December 2014 in keeping with its eye-popping 40 billion dollar valuation.

It first began with the negative- the alleged rape of a passenger by the Uber cab driver. There was media outrage, public outcry on the lax background check by Uber before recruiting a partner, leading to the banning of Uber operations in Delhi and a few other Indian cities.
Now I see the trickle of positives, how Uber adds to efficiency, lowers cost etc., leading to the inevitable deluge, reversal of bans, and establishment of Uber as chief transport disruptor in India.
It is when the positive aspect of Uber, from its benevolence in compensating the taxi drivers, or the lost high earnings of Uber cab driver, such as this story in Economic Times, that I start wondering- how Über-naive are we.

Just as not everyone can be above average, not everyone can get a bargain at the same time. Uber has made rapid inroads in various cities across the world in part by skirting the regulations over the Taxi business. It has reduced or eliminated whatever entry barriers existed in a person ferrying people for money within a city. And as the entry barriers decrease, the supply of Taxis would increase to the point that earnings of a Taxi driver are no more than the minimum (subsistence) wage that he/she is willing to accept. Uber does not come with any technological innovation in the mode of transport – the Taxi driver is still faced with the same cost of financing, fit-out, insurance, maintenance and fuel. At most, he need no longer comply with select regulations imposed by the local government controlling either the supply of taxis, or impacting service quality, or does away with the middleman, the various Taxi stand operators as in India.

In his book Zero to One, Peter Thiel, the founder of Paypal and an early investor in Facebook advocates finding and building monopolies as the only source of profit, and relegates competition to the status of a flawed ideology pervading society that distorts thinking.

To quote Thiel - "Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival". This wisdom is backed by Economics 101- in a state of perfect competition, firm cannot make any more money than is necessary to cover its economic costs. Thus, profits are by definition transient, and sustained profit call for some type of monopoly power, as advocated by Peter Thiel.

This is what will happen to the Uber Taxi driver, the fares will go down to the point that driving a Taxi can only be a part time job, not enough to provide a decent quality of life. By connecting the Taxi driver to the customer, Uber becomes the only middleman in the game, raking in a cool 20% for providing this “service”.

The problem does not stop with this mode of disruption with all risks farmed out to the Taxi driver and the consumer, there is a bigger concern caused by the informational advantage that Uber may find difficult to resist exploiting. Even now, while Uber connects the buyer and the seller of Taxi services, the prices are still set by Uber. A truly free market would allow a large number of buyers and sellers to interact leading to price discovery through the invisible hand. In the world of Uber, the invisible hand is the Uber pricing algorithm, not the buyer or the seller. Uber has its model of Surge pricing whereing prices are increased by Uber to match its assessment of supply and demand. But with Uber servers and algorithms having complete information on both the buyers and sellers of Taxi services, it can easily manipulate these prices to its advantage. It is a common economic phenomena that sometimes farmers can earn a higher income during a bad season

With Uber, be prepared for a highly volatile weather, with frequent surges.