Overtime yellow cabs have become an icon of transportation in big cities across the United States. In recent years however, an independent taxi service, Uber, has begun to capture a portion of these medallion taxi services’ market share. Uber has been able to differentiate themselves in the market by developing a strategy that better aligns with customers’ preferences. By eliminating the delay to find a ride and the wait time to pay for the service, Uber has effectively differentiated themselves by decreasing the customers’ overall travel time.
In order to gain a better perspective of how accurate recent claims that Uber is acting as a substitute for taxis and not simply a complementary good, I am going to focus purely on the market in New York City. While it is often stated that Uber is simply profiting from a under-served market, there is strong evidence that would support they are acting as a substitute good within the market.
First, there is evidence of a sharp 16% decline in taxi rides since June 2013 and a total of eight medallion certified taxi companies experienced foreclosure in 2014. In How Uber Is Actually Killing the Value of a New York City Taxi Medallion, James Hickman, notes that these foreclosures and the decrease in demand do not align with past trends of taxi rides during a time of economic expansion.
Furthermore, the convenience of Uber has driven an even more drastic drop in demand during the hours of 11 pm to 5 am. This 22% decline in demand for taxi rides is most likely driven by a customers ability to wait safely inside while awaiting a ride home, versus attempting to hail a taxi during these late hours of the night.
However, it is worth noting that Uber may only be directly acting as a substitute within Manhattan and not throughout New York City as a whole. During April-June in 2014 to 2015, there is evidence that taxis only showed a significant loss in rides within Manhattan. While the number of rides in some areas, such as the Bronx or Staten Island, did not grow as significantly as Uber, the number of total taxi rides given were still not significantly affected. In other areas, such as Brooklyn and Queens, Uber acted more as a complementary good to taxis, as both companies experienced significant growth within these regions.
Can one conclude that Uber is acting as a substitute for taxis within large cities? It is too soon to say. While it is clear that Uber is experiencing a large amount of growth in recent years, I think there is room for both services in these large cities. However, it will be interesting to see if the market will follow recent trends and ultimately be divided by which service controls the market based of the time of day and pickup locations.
Sources:
The Street: How Uber Is Actually Killing the Value of a New York City Taxi Medallion
Five Thirty Eight: Uber Is Taking Millions Of Manhattan Rides Away From Taxis
The Economist: Taxis v Uber Substitutes or Complements?
23 Comments
I interviewed medallion taxi drivers in NYC in January about the impact of Uber. Medallion prices are indeed down, from $1 million towards $500,000. More once others have commented – is this an example of price discrimination on the demand side?
And what of the supply side? For that you should look at Dilbert, who has a series of strips on driving for Uber (link to the first on left).
The demand for easy transportation in Manhattan is a near constant, but the market illustrates a different story. When I visited New York as a child, my parents would hail a cab if we needed to get somewhere fast. When I visit as a young adult, I call an Uber instead. My generation has become used to instant gratification, often brought to us from behind a phone screen. Why stand on the side of the street competing with others when you could have a personal chauffeur delivered to wherever you are in minutes. Why take the chance of getting in the car with a somewhat random taxi driver when you could review the Uber driver and read reviews from previous passengers? So perhaps, in addition to this being a possible price discrimination and market share issue, this is an issue of preference and societal changes that illustrates the nature in which economics is a social science. Because I feel safer and more productive in an Uber car, I rarely elect to hail a cab.
I think that this is a very insightful argument for why many young adults choose Uber over taxi services. In addition to the idea of instant gratification and the apparent luxury of having a private chauffeur, Uber customers utilize a sleek app that lets them pay digitally and/or digitally split the ride with friends. This seems to make the whole experience more modern and sophisticated. I find it interesting that the most drastic drop in taxi activity is from 11pm-5am. There is no doubt that Uber appears more safe and user-friendly, but recent stories of Uber drivers becoming hostile and violent (Michigan) will challenge this assumption.
http://www.cnn.com/2016/02/21/us/michigan-kalamazoo-county-shooting-spree/
I think something that should be mentioned in this discussion is Uber’s use of surge pricing – a multiplier system that increases the Uber fare rate when there are more ride requests than drivers available in a given area. The idea behind the surge pricing is to let those that are willing to pay more for rides go first. Is this an example of price discrimination, as the system leads consumers to group themselves into 2 (or possibly more) distinct groups – those willing to pay immediately and those willing to wait (or venture out of the surge zone) for a lower price? Is/will Uber still be a substitute to medallion taxis when the smaller market of common surge price zones is considered? Do consumer preferences for Uber change significantly when these customers are faced with surge pricing decisions?
I think you are absolutely right about uber’s price discrimination strategy on surge pricing. Much like airplane tickets, uber vehicles with different pricing according to demands are identical in economics since they all provide the same service. In fact, it is a price discrimination within another price discrimination since uber is already discriminating at different price levels from uberx to uber black/lux, not to mention the uber carpool option (which is even cheaper than uberx). This generates huge amount of revenue for the firm with very few extra costs.
As we move forward, I think the business model of Uber could prove to be problematic. Specifically, there has been a lot of recent discussion as to whether Uber drivers are actually employees or independent contractors. In some cases, Uber has said that its drivers are not employees and therefore are not subject to receive compensation benefits, business expenses, and other logistical things that come with being an employee. While Uber drivers often enjoy the flexibility of the business model (making their own hours, using their car, etc.) I tend to believe that insurance companies, large cities, and state labor boards will have a problem with this. I’m not quite sure about this but as it appears to me, if a driver were to get into an accident then Uber would not be responsible for damage payments. It will be interesting to see if state governments as well as possibly federal will make Uber change their business model and create a more professional work environment similar to a traditional taxi service.
I agree with this point. A similarity to Uber can be drawn from the medical marijuana in western states in the early 2000s. These shops experienced great profit margins with small scale distributions. As they grew, so did their profits but also media/ federal government attention. Soon federal agencies like the DEA would raid these shops. Granted, the federal government has not shut down Uber’s operations on a large scale, but there has been riots and public uproar. Uber would benefit from developing a business model that anticipates the trends and demands of the public, to also give credit when they eventually need to lobby to Congress for Federal recognition as a business.
Interesting that you drew a comparison between Uber and medicinal marijuana. If you have not seen it, “High Profits” is a great documentary (on Netflix) that describes the process you mention – a shop in Breckinridge Colorado opens to big profit margins but faces increasing scrutiny from the government and law enforcement, as well as citizens in the town.
I feel the need to make a point of caution between drawing a complete comparison between the two entities, however – it’s not like the general idea behind Uber has been illegal and criminalized for a long period of time by law. Still, I think the point about Uber needing to start looking long term is indeed pertinent – especially in regards to lobbying. Given the trend of our government to grow bigger and bigger (regardless of the ruling party), regulating Uber and companies with similar business strategies will probably come to the table sooner rather than later. Lobbying will become critical in this process. In the end though, I find Uber’s biggest challenge going further may be customer safety. Uber already has many ways to ensure this (as Kinsey notes above). In thinking about how the government would regulate Uber safety, I find myself drawing comparisons to how the government regulates the second amendment. Maybe the two will become intertwined?
You make a great comparison between Uber and medicinal marijuana dispensaries as targets for increased government regulation. I think another very important problem to point out with medicinal marijuana dispensaries is their inability to deposit cash. Even though medicinal marijuana is legal in 23 states, it is illegal federally. Because of federal banking laws, banks are unable to accept deposits from these dispensaries which forces them to sit on large amounts of cash. This dilemma has caused dispensaries to become targets for thieves and robbers seeking an easy cash pile. As the marijuana business becomes more and more legitimate across the nation, this problem will only continue to grow. If not make medicinal marijuana legal on a federal level, at least provide some provision for accepting dispensaries’ cash in states that do allow medicinal marijuana.
Another thing to consider are the lawsuits that have been filed against Uber. There are a lot of pending lawsuits against the company, and many seem to be going poorly for the company. Maybe the company can weather them and become a successful business that will be here for years to come – but maybe the lawsuits filed against it will result in the company’s demise just as quickly as it rose to become a considerably large company.
Sources:
http://venturebeat.com/2016/01/03/oconnor-v-uber-why-the-days-of-driver-flexibility-are-already-numbered/
http://arstechnica.com/tech-policy/2016/02/more-uber-drivers-file-labor-lawsuits-one-claims-he-only-makes-80-per-week/
http://www.wired.com/2015/09/uber-appeals-class-action-ruling-in-worker-misclassification-lawsuit/
Uber is a relatively new and interesting concept to the American public. Why would anyone call some random person in an office down the block when you can push a button, have another drink at the bar, and receive a call from Dan when he rolls up in his 2010 Prius when he gets there? There are, however, several downsides to the new ride service. Uber is an incredibly under-regulated service. Where taxi’s have insurance qualifications, operating fees, and taxes levied against them by the government, Uber does not. This leads to the price discrepancy that most taxi drivers are dissatisfied with.
Safety is also a major concern. When anyone with a moderately clean criminal record and a car that is no more than 6 years old can pick up strangers, the potential for criminal activity to occur is very real. Early this year, an Uber driver in Kalamazoo, MI killed 6 people over the span of 5 hours before he was caught by police.
Incidents like the one in Kalamazoo point out the flaws brought about by the lack of regulation within the Uber organization. It will be interesting to see if the government decides to step in, not only for the taxi drivers, but for the safety of the consumer as well. It’s certainly a very real possibility.
Uber and Lyft’s unprecedented success stems from the convenience that it offers on both sides of the market, suppliers and consumers. The convenience to the consumer has already been discussed in the previous comments. Consumers don’t have to deal with the hassle of hailing a cab, the app is sleek and streamlined, and often, travel time is drastically reduced.
On the supplier side, however, the convenience is enormous. Overhead cost of a car and medallion purchase are completely eliminating, saving each driver (or the company that employs the drivers) around a half million dollars. Beyond that, employment is scheduled around the driver’s convenience. Becoming a cab driver is an enormous commitment. Long shifts are required to simply turn a profit in the business. As an Uber driver, you can get off work, hop into your car, and make some cash in your spare time. This has drastically increases the pool of available drivers in the market. Consequently, the inconvenient taxi service has seen a reduce in demand, and this can only be expected to continue as new drivers choose to work for Uber over a taxi company.
1. Is entry into the Uber type of service easy? If so, then their profits will erode. And their share price, which is built upon assumptions that don’t bear up to even a bit of scrutiny, compounding high growth rates for extended periods of time, that sort of thing.
2. BTW you’ve always been able to call for a cab, on more than one occasion I’ve scheduled an early am pickup for an airport run. And the fare won’t be jacked up because of short-run supply-demand as judged by Uber’s algorithms.
3. On the supply side, if entry by drivers is easy, which it appears to be, then won’t the income drivers can earn fall below minimum wage? Isn’t the model dependent on drivers not properly factoring in the cost of their vehicle and so on? So won’t Uber be left only with lemons as drivers?? I have never had a cab driver who wasn’t a professional (however poor their English might be), often they’ve been driving for a decade or more, and are highly educated (being a dentist in a developing country provides no help in getting licensed in the US).
Zach brings up a good point – and I wonder how much of a competitor Lyft is to Uber, especially in NYC where Lyft does relatively better than in other markets. They have different pricing formula so perhaps certain groups of people would benefit more from one than the other?
Excellent post. New Uber transportation concept is very interesting.
Thanks for sharing this post. Uber is always on time early pickup and drop off.
Great post. They are very professional and polite. Uber is one of the best choice for travel to anywhere.
Uber is growing well nowadays…..But i think they can’t provide executive taxi as well other can…
Its an amazing blog to read… Thanks for sharing
I personaly like Uber instead of taxi because they reach at time. And i really appreciate your blog 🙂
Yup you are right, UBER is quite progressing well while taxi services are not in New York City. UBER damaged their market value and also damaging very fast.
Zach brings up a good point – and I wonder how much of a competitor Lyft is to Uber, their one competitor of his Airport Cars London they are also very reliable and both have competitive prices challenging each other
Indeed, there are no entry barriers for ride-hailing – and it’s a business with the thinnest of margins, absent government regulation on the number of cabs (“medallions” in New York City). In most markets there are multiple competitors, and Uber/Lyft haven’t driven out traditional cabs, either. But to attract drivers new entrants offer slightly better pay (though drivers seem to underestimate the costs of operating a vehicle – I chat with drivers when I use one of these services). They also charge less than a traditional cab. So they lose money at both ends. To break even they must raise fares and/or lower driver pay. But then they have no advantage over regular cabs, at least in those markets (Sao Paulo, Brazil) where an app writer has created a system to make it easy for users to hail and pay. Some cities in the US have done that.
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