Some thoughts on game changing influx of Uber


With the appearance of Uber and other similar platform-based driving services, the transport market in the cities changed for good, even in those cities that limited or regulated this kind of service. We used to call these platform-based services ridesharing services, but to be more precise, these are ride-hailing services matching passengers with vehicles via websites and mobile apps. The difference between ridesharing and ride-hailing is that in ridesharing, the driver shares the destination with passengers, and in the case of ride-hailing, he or she does notIn ridesharing, car owners can better utilize the empty seats lowering fuel usage and transport costsCar hailing might be just a typical job based on drivers owned or leased car, or just a way a car owner with some time to spare offers a lift to passengers to lower yearly costs of car ownership, including its depreciation.

In the original Uber business, drivers are independent contractors. Drivers use an app to receive and accept rides. Passengers use an app to order a ride, where they are in advance quoted the fare. Uber uses a dynamic pricing model. Prices for the same route vary according to supply and demand for trips when the ride is requested. Uber is a network service that matches rides using an optimization algorithm. The same app and electronic payment method are used worldwide by the customers. It is no matter whether you are in Europe, the US, or somewhere in Asia.


UBERISATION AND UBER FOR X SERVICES

The platform-based ride-hailing companies gave birth to a new solution in the services market that we refer to today as Uberisation. According to Wiktionary, Uberisation is the utilization of computing platforms such as, but not limited to, mobile applications or websites to facilitate peer-to-peer transactions between clients and providers of a service, often bypassing the role of centrally planned corporations. It eliminates traditional middle-man roles. The business model has a different set of operating costs compared to a traditional business. Its main features are: [1] the use of a digitalized platform enabling peer-to-peer or quasi-peer to peer transactions, [2] minimizing the distance between the provider and customer of a service, and [3] the use of a rating system for the quality of the service provided by a provider.



Uberisation is a cause of disruptions in well-established markets. As Uberisation may in practice mean that many people possessing some easy to learn skills like driving can perform a job as only some part-time additional income source, it has been criticized for threatening jobs and regular businesses. It also leads to disputes over how the provider of services via an uberised platform should be held accountable to corporate regulations and tax obligations.

And yet another term appeared in recent years. It is Uber for X. It describes all possible activities or skills that many people comprehend and for a fee can offer to others. It can be a shopping service, cleaning service, simple help with gardening works or other physical activity that we all sometimes need, or guided tours in a city by people possessing some historical knowledge with no guide license, and so on.

If you travel a lot and use guiding services, you probably know how difficult it is to get to some museums, palaces, or castles with somebody who without a license is giving you a tour. If this is one to one service, nobody will intervene because it looks like you would be just talking, but if this is a family of four or five with a person who acts as a guide, he or she would be charged with a penalty. I can understand that people want to protect their professions, but I still have nothing against that a hobbyist with extensive knowledge does for a smaller fee. Who wouldn’t in the near-zero marginal cost economy? In particular, at some places, guiding fees may reach a couple of hundreds of euros for two- or three-hour work. If the guide is engaged, it is ok, but if you deal with somebody who you feel treats his or her job as some burdensome routine, then you know you pay solely for the fact that he or she holds a license, but not for the guided tour. Some rating system on a digital platform would probably do to confirm the hobbyist’s skills and devotion, like in case of Airbnb experiences.

The market disruption of 4.0 economies is sometimes about breaking the prohibitive prices for services that require some knowledge but no real risk-taking or higher engagement. In many cases, a couple of weeks of intensive learning would allow them to specialize in a couple of routes. Indeed, we have here two perspectives – of people accustomed to professional stability with no true added value and customers who would like to pay less. Besides, guides had been today replaced by audio guides or even augmented reality guides. It is pretty much the same as in the case of autonomous cars that, in the future, would replace the drivers. Only if a guide or a driver provided some higher quality like good socializing skills; indeed, we would be willing to pay more.


SOME THOUGHTS ON HAILING SERVICES

Yet again, let us look at Uber and its primary service.

When it comes to the supply side of the traditional taxi business market, which means the number of available drivers or taxi licenses, cities have or had two types of policy in this respect. Either anyone can apply for a license, and there is no upper limit to the number of licenses, or the number of licenses is fixed and dependent on the potential demand in the city in a way to ensure a decent income to people living from this limited number of licenses. We often call it a medallion system, as each license is one medallion that is tradable at a market price. In the latter case, several taxi drivers can take turns on one medallion taxi. The number of medallions may increase as the demand for services increases in the city, for example, when the per capita income becomes higher and more and more people can afford a taxi.

Suppose the taxi drivers offer their services owning or leasing a car and a license for which they pay a fee that is by far not a very costly investment. They pay taxes. But besides driving skills confirmed by a driving license, no other skills are required. Years ago, a taxi driver had to know by heart the entire city. But those times have been gone with Google that developed its Google maps application. Suppose an Uber driver is registered as a business, pays taxes and a fee to Uber. However, he does not hold a taxi license and is not subject to any governmental or public authorities’ oversight. If Uber makes a background check on the potential driver and checks his or her driving skills and later puts attention to the rating system and gets rid of drivers negatively assessed by the passengers, the quality is provided for. So ultimately, only possessing an easily available license is the difference.

Things get more complicated if taxi services for market equilibrium or quality purposes are limited to a certain number of licenses in a city that are a costly investment. Madrid or New York are examples here. The taxi license or a medallion is a tradable good, passed from father to son, sold at an exceptionally high price, or rented for a monthly charge. Since historically, cities applying the medallion have increased the number of medallions slower than the demand for taxis grew, medallions have been considered an investment. Possessing a license, you could have truly made your living. With Uber and other ride-hailing companies, those medallions lost on value. The system broke.

Being a taxi driver is in front of our eyes, changing from a profession into a kind of service offered by anybody who can drive, owns a driving license, owns a car, wants to work, and delivers quality for money. I mentioned it already while talking professional guides. Perhaps once, the ability to drive was really something special. Maybe once it was really special to own a car. But in today’s world, repetitive skills that do not bring any added value, do not involve risk, do not require any extra qualifications, do not require any special abilities ceased to be an activity for which we are willing to pay higher prices. Many people are willing to do the job as a part-time occupation just to cover for fixed costs of their cars or some other reason and have appropriate skills and are ready to do this at lower prices. And let us be frank here, the next change will come with autonomous cars. We will probably not need taxi drivers unless we decide to call a regular driving service with a driver in a cab just for socializing purposes or for vanity.

At this point, we could ask ourselves, however, is there anything else what must we, as passengers, get from taxi service to be willing to pay more so that professional taxi drivers could make their living out of this service alone? What could be the added value of a taxi service worth extra money to pay?

In Madrid, I was once given advice not to use Uber, because the Uber application redirects drivers to highway connections. You get to your hotel quite quickly, but at a higher price than a licensed taxi driver would charge you with shorter millage and only a 5 minute longer trip. I found this advice reasonable. But in fact, this shortcoming is easy to correct by changing the algorithm or giving the customer a choice in selecting the ultimate route.

We could also argue that if regular taxi corporations are active in the city, there is a certain stability of service offered. Each time you need a cab, you have a cab. And we could be willing to pay more for it.

But what if the taxi corporations in the city cannot or cannot any longer offer this kind of stability. In fact, you never have a guarantee that you have a taxi if you, for example, need to be driven to the airport to catch a plane. Even if you order a cab with a one-hour advance, the system confirms a taxi only with a 10- or 15-minutes advance. In practice, you do not have any guarantee that you would get to the airport on time. In that case, the service guarantee is the same as in Uber that relies on freelancers and part-time drivers.

Once I needed a taxi to catch an intercity train. I called the taxi with 45 minutes in advance of my departure with something like 15 minutes to get to the central railway station. And one of the biggest taxi corporations in my city w with a theoretical service guarantee of 10 minutes that at that time employed over 1,500 drivers was not able to give me a taxi in time for me to catch the train. From this day on, I started to use Uber as one of the alternatives. But with Uber, I once almost missed the airplane to Brussels. And I saw it on the Uber app. The Uber driver, who was supposed to pick me up in then minutes according to the expected arrival time, took time to spend some time with his folks. It was not that difficult to deduct. A Turkish driver stopping for long minutes at a Kebab restaurant around 10 am. Thankfully, the guy had excellent driving skills and navigated through traffic jams so well I got on time. But after some other incidents, I lost my trust in Uber. No, in my city, you do not have a guarantee that the taxi or Uber arrives on time as you need it.

So, one of the qualitative questions we could raise here is whether riding services are to be treated as a public utility service or not? One of the features of public utilities is providing for continuity of services, which means staffing a schedule, overtime during heavy traffic, and additional freelancers on the phone just in case. Looking at my past experience with taxis and Uber, yes, I would be willing to pay more if I had a guarantee that I would order a taxi for 8.00 am. I would be willing to do this in advance, let us say of one hour, it appears there where I need it at exactly 8.00 or a couple of minutes earlier.


SUPPLY, DEMAND AND THE MARKET PRICE

Taxi systems usually rely on fixed tariffs, which in one way or another are linked to a minimum wage. We usually operate in the range from minimum fares to maximum fares, unless we talk about luxury services. Still, these usually are another passenger transport segment subject to a different set of regulations.

In Uber, price-fixing is forbidden to drivers, but passengers always know the fare before ascending an Uber car. From the passenger’s perspective, Uber’s advantage is that when ordering transport, the passenger knows in advance the amount to be paid. And he or she can decide whether to use the service or not at this price level. This is why even cities with regulated passenger transport tariffs were not able to regulate Uber. Besides, Uber offers various levels of transportation service at different prices.

When talking about choosing a trip at a very high a fare, let us say triple as the usual one, or resign we should, however, bear in mind that we could need to get somewhere on time or urgently being unable to use the private car and the public transport would be inconvenient. A passenger’s choice might be limited, and willingly or not, he or she would have to accept the price. As passengers, so the demand side of this market, do we really accept here the pure market game? Or maybe we would rather like to treat taxi service as a kind of a public utility service?

On the other hand, Uber drivers do not have any control over the fares they charge. It does not matter whether we are talking about very low prices when there are many drivers available and few potential passengers need a ride, or when there is a very high demand, few drivers are willing to drive, and the rates soar significantly higher. They will certainly accept the trip when the price is high. But are they willing to skip all cheap trips? Can they afford to skip all the cheap trips? Can they make their living by taking only high-fare trips?

So, the fundamental difference in purely economic terms between a taxi company and Uber is that taxi drivers drive at a certain price no matter what the relationship between supply and demand is at a given moment, and Uber uses a dynamic pricing system. The price at a given moment is a product of the market game between supply and demand.

When there is no limit to the number of licenses, the supply is in no way linked to the demand, and there is no pricing mechanism. The prices established are somehow between affordability levels for passengers and profitability levels for taxi drivers. Such a system will always be more or less discretionary.

If the limited number of licenses or medallions depends on the potential demand, we are dealing here with a price mechanism, only that it is a mechanism established in the long or medium term. The difference between a medallion system and Uber is therefore that in the first case we are dealing with a system of fixed market prices over a certain period, and in the case of Uber with a dynamic system of prices established in real time. Contrary to real-time pricing, the medallion system does not tackle the short-term supply or demand instability.

A dynamic pricing system provides for a pure market mechanism. We can assume that if not working Uber drivers see higher fares at a very moment in a certain area, they would be willing to join their fellows quickly. The market prices would then fall. But what if we deal with high demand and only a few taxi drivers earning on fixed fares are willing to work at the very moment, and no price incentive could make them quickly be sitting behind the wheel? What could be the solution? Some regulations, maybe?



Two primary charges against Uber are the treatment of drivers as independent contractors and disruption of the taxicab business.

Drivers in Uber are independent contractors, and this was the fundamental idea behind Uber. Sharing the costs with drivers by Uber as an operator could make trips more affordable to passengers. In some parts of the world, Uber drivers have begun to demand employee status. They also demanded some minimum wage and Uber covering costs, such as fuel costs as well as unemployment and disability insurance. It contradicted the idea behind Uber’s core business. A regular contract provides for job security. But it is not only about social security and the costs of working tools. There are also additional obligations, like a certain number of working hours per month and a limited number of vacation days. If we treat this kind of service as a public utility – it would be working according to a schedule.

At this point, we also return to the question of whether driving for Uber is a regular job or just sharing your car and free time. Does the driver have any other job, thanks to which he or she earns his or her living, earns some extra dime while driving Uber, or does someone treat Uber as the primary source of their income? In the latter case, of course, we can ask ourselves what the difference between him and a professional taxi driver is, apart from owning the taxi license, of course. Where there are no limits on taxi licenses, it is none. In the case of medallions, this would be a costly investment into a medallion that provides job safety and additional incentives to reach break-even on such investment.

I used to use Uber quite a lot in the past, and I often asked drivers why they were doing it. In the initial operation phase of Uber, these answers were like: ‘I have free time, so I earn extra money because I would be otherwise be sitting in front of the TV‘, ‘I’m currently looking for a job, driving means that I do not strain my savings‘, ‘I am on parental leave, and I go for entertainment to just talk to people‘. Over time, an increasing proportion of drivers seemed to use Uber as their main source of income. Also, many taxi drivers started switching to Uber or drove here and here. Uber is cheaper, so it simply brings about more customers. It is more work but a lower income.

But in my city, there is no limit for taxi licenses. The more taxi drivers, the fewer potential customers fall for each of them at a fixed price. Each licence added to the system means diluting of the market. Uber, which is cheaper than taxis, made more and more people want to use this type of transport service (lower price equals higher demand) and made many people who could afford to use a taxi change to Uber. And it was a perfectly rational decision. But it diluted the market even more.


Two things changed from times as licensing systems had been invented to now. Now we have platforms that collect past and real-time data on both groups of their customers (drivers and passengers) and may use it, and we can apply dynamic real-time pricing. Platform services like Uber are part of a puzzle referred today to as a smart city. So far, however, no one has come up with an idea of rearranging it in the 4.0 world so that it looks good for both the passengers at the demand side and the drivers at the supply side.


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