Can prices ever be "too low?" The short answer is yes, but not very often.
Generally, low prices benefit consumers. Consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and
then raise prices to above-market levels for a substantial time. A firm's
independent decision to reduce prices to a level below its own costs does not
necessarily injure competition, and, in fact, may simply reflect particularly
vigorous competition. Instances of a large firm using low prices to drive
smaller competitors out of the market in hopes of raising prices after they
leave are rare. This strategy can only be successful if the short-run losses
from pricing below cost will be made up for by much higher prices over a longer
period of time after competitors leave the market. Although the FTC examines
claims of predatory pricing carefully, courts, including the Supreme Court, have
been skeptical of such claims.
IANAL, but I'd be very interested in hearing a lawyer's take on this.
Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses. In markets with a large number of sellers, such as gasoline retailing, it is unlikely that one company could price below cost long enough to drive out a significant number of rivals and attain a dominant position
The key part is "...has a dangerous probability of creating a monopoly for the discounting firm".
That's not the case here. I don't see Uber creating a monopoly in any way. If they raise prices to unreasonable levels (i.e., more than people used to pay for regular cabs), people will go to Lyft, Juno, or the next ride-hailing startup. If there's no competitor remaining, new ones will show up. Or regular cabs will be back.
IMO, the endgame for Uber is not to raise prices; it is to reduce costs. They're betting the farm on driverless cars.
Not too different than Amazon with retail. Amazon doesn't need to charge more than the local retailers they've put out of business; they just need to have a lower cost structure.
Amazon had a structural advantage built into their more efficient online operations vs. a traditional brick and mortar store.
Regarding your point about probability of creating a monopoly:
"Brishen Rogers, an associate professor at Temple University’s Beasley School of Law who has studied Uber’s effects on the taxi market, said traditional cab companies are clearly threatened by newer competitors, and he expects many more will go out of business as a result.
[Many] lenders, including Citibank, expressed concerns about the effects that “nontraditional ride-sharing companies” would have on the city’s traditional medallion-based business model.
"
Traditional taxis are threatened by new competitors, but the plural here is important. It's not just Uber, it's Uber, Lyft, and all the others that can come up. Here in London we already have a large number of minicab companies. Uber is very successful because they're cheapest. But as soon as they'd raise prices someone else will take the crown.
Developing a basic app for taxis (calling a cab, paying, ETA) will probably not cost more than a few millions. Getting people to drive for you (in addition to other companies) is also very easy at the moment. That makes barriers to entry extremely low in the market. It's not an Amazon with huge warehouses and not a Google with a highly sophisticated search algorithm. Uber just competes by price, they have no real technical advantage here.
The lack of medallion rent-seeking could be Uber's structural advantage against taxis.
The framing I see sometimes of Big Mean Uber vs 'poor little guy cab driver' seems wholly out of touch with my experience. At least in Boston the taxi system is/was rife with corruption and cronyism. Neither riders or drivers get a good deal, just medallion owners and the regulators they captured[0]. The money isn't staying in the 'local economy', to 'small business owners', it is, by and large, going to rent-seeking medallion owners, many of whom live out of state to monopoly holders who use that power to prevent competition through regulation. I'd happily pay the same to take an Uber driven by someone who wasn't being exploited and who was accountable for the quality of the ride than a crappy medallion cab with a driver who is on the phone, the whole time being forced to watch ads on their "entertainment screen" with no off button.
Uber isn't a monopoly (yet), but they are breaking a monopoly, and that's a good thing.
> IMO, the endgame for Uber is not to raise prices; it is to reduce costs. They're betting the farm on driverless cars.
What special advantage does Uber have there, though? Many companies are working on driverless cars. When that reduces costs, it'll reduce costs for Uber's competitors too.
And it's not clear that Uber's strategy is to eliminate competitors, rather than engaging in a scheme to turn investment money into "growth" for raising further investment.
