Thursday, June 15, 2017

Keeping the Uber thread going

For those joining us late in the show, we've spent this week discussing some of the problems with Uber's current business model and some of the proposals for the future.

Even evil plans require a certain level of competence

Ponzi Thresholds

A follow-up to Mark's post

One of the issues we've brought up more than once is that some of the companies difficulties appear to run so deep that even achieving a monopoly would not be enough to resolve them. Over at LGM, Scott Lemieux has reached a similar conclusion:

But it should be obvious that the Standard Oil model won’t work. There are two fundamental problems facing Uber’s potential profitability:

    The inherent costs of entry are low
    Demand for cab service is highly elastic

The circle just can’t be squared. The reason it takes a lot of venture capital to compete with Uber is because it’s massively subsidizing riders and drivers. But if you assume that Uber can charge market rates and still make a profit, then it would be easy as pie for a competitor to enter the market. To assume that market rates are profitable and that it would be extremely expensive to enter the field is a Mnuchinesque mistake. If you share my assumption (and, apparently, the assumption of the companies themselves) that they would hemorrhage riders if they charged market rates, then it doesn’t matter if Uber achieves quasi-monopoly status — it’s still losing money.

And the problem is even more acute in smaller, less dense markets than NYC and SF. Some of the problems I identified — cars in poor condition, opaque pricing, forced ridesharing — are regulatory failures and/or cases of companies being incompetent. But there’s a reason why outside of the biggest cities cab service tends to be unreliable if it’s available at all outside of transportation hubs and major hotels. Basically, in cities where people don’t take cabs for most trips you face the choice of making it worth their while for drivers to stay on the road when they don’t have passengers, or you’re going to have cases where people want cabs and can’t get them. Given that demand is particularly elastic in places where people generally have cars and rarely use cabs, cab companies are probably going to choose the latter. But this creates a downward spiral — if you need a cab and can’t get one, you’re even less likely to use a cab going forward. I don’t see anything about Uber’s technology that solves this fundamental problem.

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