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Why You Should Care What Uber Does, Via Time Magazine

Why You Should Care What Uber Does, Via Time Magazine

The ‘sharing economy’ matches people who want to share assets online. Rather than buying a car that I only need for 1 day, for example, I can just rent one from someone else who’s not using theirs. Such efficiency gains may come at a cost for the traditional economy.

Standard Rental car companies will need to diversify their operations or will stand to expect profits shrink due to the drop in demand and may even be driven out of the market.

However the costs and benefits associated with sharing economy platforms depend on the business models in place.

Uber is one of the fastest-growing startups worldwide, but its rise has led to massive demonstrations by taxi drivers. Courts around the country have banned or restricted Uber’s services for engaging in unfair competition with regular taxis. While other ridesharing online platforms like Lyft and Sidecar use similar business models, Uber is at the center of the debate due to its size and rapid growth worldwide and its effect on taxi businesses, particularly at the airport.

In December Uber was valued at $68 billion, having taken just 6 years to surpass the valuation of 100-year-old companies like General Motors and Ford, as well as “traditional” transportation companies like Hertz and Avis[2].

Source: Forbes

Uber vs. taxis: passengers

Uber connects drivers offering rides and passengers seeking them online. Potential passengers download an app that allows them to request the nearest available ride on their smartphone. The company does not own any vehicles but signs up private drivers willing to provide rides to paying passengers and passes the ride requests directly to them.  The implications of outsourcing this service without proper vetting will remain to be seen.

Uber sets the price of the ride, and transactions happen through the online platform. 70-80% of each fare goes to the driver and the rest is kept by Uber.  Drivers are in turn treated as contractors and all expenses for operation are their individual responsibility.  Can you see where this is going?

Uber’s online platform is user-friendly, and its rates are generally lower than regular taxis[3]. Uber is cheaper in most major American cities, even excluding the taxi driver’s tip.

Uber’s pricing model is dynamic, changing the price to equalize supply with demand. If there is high demand for rides and few drivers on the road (common at weekends or on national holidays), the price increases. Dramatically.

This motivates more drivers to work, and reduces the number of passengers, as some prefer other modes of transportation (for example regular taxis) if the price is high.

The app informs customers when “surge pricing” takes place, and the price of the increased fare, so there is no asymmetric information.  However many passengers have reported this may not always be the case.

In short, rideshare, while a convenient alternative to taxis but leaves an industry in ruin, contractors underpaid for their services and expenses and the consumer and drivers at risk for crime.

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