Agreed. The dominant strategy seems to be to undercut competitors until they are driven out of business, and then you can raise prices. However, raising prices then gives opportunity for a new ride-sharing service to come in and say that they can compete by offering lower prices for a period of time...
This is a strategy that has "worked" in transportation markets before. This is what the post-privatization 1980s bus wars were all about in the UK.
A few companies won out, consolidation happened, unprofitable routes were dropped and prices rose on profitable routes to a level where bus riders could be more reliably tapped for profits - largely by monopolies and duopolies.
yes, that's how capitalism is designed to work. the window in which you can make outsized profits is meant to be temporary so companies can't just rest on their laurels.
Capitalism is not "supposed to be" a race to the bottom and then the emergence of a single, monopolistic entity. That's far too simplistic. Price and value are a huge component of capitalism, yes, but the general idea isn't "price below what is sustainable by taking in massive amounts of funding until all of your competitors are sunk and then increase prices."
Capitalism is absolutely supposed to minimize costs, that is how competition works. It is more a consequence of economic reality than a function of capitalism that massive vertical integration and economies of scale can let market-spanning monopolies form.
But as others have said, unless barriers are put in place (economically natural like mindshare or opportunity cost or artificial ones like bribed legislation) the monopoly can't abuse their situation without opening up avenues for new competition to arise to compete with them.
On one hand, capitalism is obviously not optimal - a monopoly is only held to a price ceiling of what the most nascent newcomer is capable of. They are almost always able to take home the profit of their scale and integration even in the presence of competitors. On the other hand, the only way historically nations have battled this is to micromanage a market to guarantee enough strong entrenched and scaled competition to keep there from being a decisive market leader. But over time all markets trend towards that kind of centralization.
There's nothing about this that will allow a single, monopolistic entity to emerge. There are probably hundreds of "Uber-ripoff" apps out there by now. Sure, as long as someone is willing to pour VC money into it and give people subsidized rides, sure, Uber can kill off contenders and stay dominant. But the second Uber starts raising prices to extract monopoly profits, someone else steps in and undercuts them. You can probably get started in a city for a few $100k, or even less if you have an existing operation of some sort you can leverage.
The low-barrier-to-entry nature of this market is pretty much perfectly suited for market conditions to prevail and ride prices to stabilize quite near their costs.
My interpretation of your comments is that the state of North Carolina used as an argument against deregulating its taxi market to an extent that would allow Uber to operate in the state that Uber might not survive the ensuing competition.
If so, that is indeed then a normative observation, and it's also a pretty silly argument. Thus, my incredulity that is actually the case. I'd be interested in knowing what, then, their argument actually was.
> but the general idea isn't "price below what is sustainable by taking in massive amounts of funding until all of your competitors are sunk and then increase prices."
so there shouldn't be any startups then?
because every startup is unsustainable at the beginning. every startup wants to beat its competition and emerge as the sole winner. every startup wants to raise prices and make more money.
capitalism is an economic system where individuals own (and deploy) the means of production, not the state. capitalism employs competition to ensure those means of production are put to productive uses for the whole economy, not just the individual. profits (or more directly, the accumulation of wealth) are non-productive until redeployed.
that's exactly the way capitalism is designed to work.
>because every startup is unsustainable at the beginning. every startup wants to beat its competition and emerge as the sole winner. every startup wants to raise prices and make more money.
With the idea that they will eventually become sustainable. And let's not pretend that manu (most?) startups are a massive cash sink-hole run by people who don't really know what they're doing. Regardless, if your startup's plan is to start cheap, grow their user base until they have a network effect, and then raise their prices significantly _and_ the product they offer can be easily replicated... then yes, that startup should probably not exist.
That's not really how it's "supposed to" work. It's called predatory pricing and the most ardent free-market defenders claim it doesn't exist because it's economically irrational (check out the contentious discussion and Frankenstein-like text of the Wikipedia entry on the topic).
It's predatory because it is below cost and is just intended to preserve a monopoly on a market. The goal is to eliminate all competitors, then charge a price that a competitive market couldn't sustain. The harder it is for new competitors to enter your market the better it works.
Do you feel I've unfairly presented someone's position? I don't agree with it but I think I have presented their case reasonably. Unless your objection was to my claim that they are "ardent defenders of the free market," but I think that is a reasonable characterization of the Adam Smith tie types.
You've misrepresented the conflict as being one-sided, when it's not. There's a real difference of opinion and analysis, and plenty of "ardency" on both sides.
On one side you have people who believe that predatory pricing is an issue and likely also that government regulation is needed to prevent it. On another you have people who believe that markets are so efficient that predatory pricing cannot happen. What do you think I'm missing here? Can you be any more specific than just vaguely saying I'm missing some nuance?
I meant to contrast "ardent free market defenders," i.e., people in the libertarian end of the spectrum, with those concerned about predatory pricing, many of whom would not consider themselves opponents of the free market. "Ardent" is not, in the first place, pejorative.
It is (mildy, granted) pejorative in the description of a participant in a debate, especially when only one party is it.
Search for the truth is about collecting and reviewing evidence. Being passionate (synonym of ardent) about one side (rather than possibly the inquiry itself) is a bad quality.
It's not about offence. I'm not offended. I'm challenging your misrepresentation of a debate.
The idea that predatory pricing not only exists, but is prevalent, is the main plank of the argument that competition doesn't work and wont generally sort out bad behaviour in the market, so lots of people who ideologically need that to be true cling very dearly to that idea. On the other side of the debate are a lot of people with an incomplete appreciation of the complexity of what markets can and can't sort out, especially the pretty non-ideal ones we're stuck with in a world where among other things governments and regulations play, for better or for worse, a non-trivial role.
Lost in this mess is any nuanced discussion of when predatory pricing might and especially might not occur.
And now we're getting to the point. A reasonably free market for taxis (and a such can well include requirements for insurance, background checks and rigorous book keeping) will not allow predatory pricing to occur, and this is trivially easy to show. This does not mean that predatory pricing doesn't or can't exist, just that it certainly can't on a market with these characteristics.
Well, I don't think you disagree that much with the folks at this site. Their idea is that Uber may be able to drive competitors out of business with predatory pricing, but they won't be able to keep more competitors from coming back as soon as they raise prices.
So if you invest when a company is at the end of that temporary window, you’re going to lose money? Remind me of the difference between that an MLM scheme again?
The expensive part of Uber isn't the SaaS app or even the engineers. It's the overhead of running a law-avoiding lobbying business that explicitly seeks out to just do everything as evil as possible.
I was under the impression the the really expensive part was driver incentives to keep more drivers on the road than is economically sustainable with current levels of rider demand to allow them to grow more quickly.
Even if your claim were supportable, it wouldn't explain how competitors not "seeking out to just do everything as evil as possible" have competitive prices.
There can be an argument that Uber's expensive policy-mongering is enabling the competition. Lyft doesn't have to do any lobbying, it just has to lie in its wake while Uber does everything for it pretending to be the nicer company. As long as Uber is out there wreaking regulation havoc, Lyft is happy to sit back and let Uber do that. Perhaps Lyft doesn't want Uber to die, since they're basically the ones spending money to make Lyft viable at all.
Then it's very polite of Lyft to price competitively to allow Uber to stay relevant when they could easily undercut them, due to their much smaller line item for "expensive policy-mongering."
This is conspiracy-theory level evidence and rationalizing.
Because the competitors are like comparing Sonic to Comcast. One operates in one state between two cities and has a hundred thousand customers. The other is a national monopoly that abuses over a hundred million people.
Sonic can be competitive with Comcast where it operates, but it is still a tiny blip on Comcasts radar. Uber has way, way more market volume and penetration than any one competitor, and in many places are the only game in town.
Such a business can be sustainable, but the questions are whether it warrants Uber’s valuation and whether getting customers is worth the amount of money Uber pays for it.
Apparently some investors think the answer to both is yes. Otherwise, Uber wouldn’t get the money they get.
Other people disagree, though. I’m one of them. I think it is worthwhile to invest in getting some users to your platform, but I fear they attract way too many customers who are cost conscious, and will move to a different provider without blinking an eye.
> what if the model of both businesses just isn't actually viable without massive injections of funds?
I don't know if Uber's valuation or investors are correct. The question is whether or not the business (or one like it) can fundamentally exist without investors pouring money into it.
By your claim, it sounds like you'd agree with me because a competitor is likely to emerge with similar or cheaper rates. I agree. But that in no way supports parent's claim that the price (or business model) may be unsustainable.
I don't think I follow. There's nothing impossible about running a livery service with a cell phone application for hailing, but I don't think current prices are sustainable. It is not a business with substantial economies of sale.
Well, drivers are voluntarily choosing to drive for what they're getting paid. Riders are voluntarily choosing to pay the quoted price. Uber takes a cut from the price to run the part of the business that isn't actually driving cars.
The only way the price is subsidized is if the business couldn't be run without Uber's cut covering the non-driving parts of the business, which is unlikely. They're taking ~25% (or more) on each fare. That's a huge margin for a SaaS app and administrative work.
If Uber disappeared tomorrow, it would not be that difficult for someone to build something similarly and price it the same way. In many areas, it's already happened. That suggests the price is not unsustainable.
Yep. It does cost money to expand into new geographic areas or markets (like Uber eats). That doesn't indicate that ride prices are subsidized, though.
As I understood it when they enter new markets (and maybe in other cases?) they sometimes end up paying out the drivers more than the rider paid. I personally remember a handful of occasions in SF when they had absurdly low rates for some period of time (like the two dollar rides when UberPool first started) where they were definitely losing money on every ride.
In those cases: Sure, they must have been losing money on those rides. As far as I know, though, the norm across the board is the 25% cut (which I understand is higher at some times).
If the individual driver doesn't think they're getting paid enough, that's fine. They don't have to drive for a ride-sharing company.
But it's been years now and they've got drivers, so they can't possibly be paying too far below market rate. That means the only way VCs could be "subsidizing" the price is if the remainder of the price (the cut Uber takes) is too low, which is difficult to imagine.
We already know what's actually happening--they're spending a ton of money expanding into new geographic areas and new markets (like Uber Eats). Yet that doesn't stop every Uber discussion on HN from becoming about the bubble popping on "subsidized" ride prices.
> But it's been years now and they've got drivers, so they can't possibly be paying too far below market rate.
Why do you say that? It's well-known that they've toyed in every possible way with driver rates, including showing different rates to the consumer and the driver in an attempt to hide lower-than-market-rate wages.
They still have the drivers. I'm not even endorsing it--but even at worst, that means drivers are subsidizing the ride prices, not investors.
I don't think they are, though. If they were, they'd be having trouble keeping drivers working and we'd see complaints about long waits and unavailability.
There have been stories that drivers in searches of riches lease a car from Uber, which is paid off by being an Uber driver. If they leave the platform, they can't pay their lease.
Low-income "gig economy" workers might not have the mobility to leave for better jobs. Perhaps that's a privilege only certain classes of well-paying jobs have.
I don't think you understand. Uber loses money on every ride. The only reason they can set such low prices is they're burning through investors' money.
No--the only reason they can pursue growth into new geographic areas and pursue new business models (like Uber eats) is because they're burning through investors' money. That in no way implies that their rides would not profitable if they were not spending so much on growth.
But that's basically every business focused on growth.
> In an epic five-part series of blog posts, transportation industry analyst Hubert Horan lays out the case for skepticism about Uber’s hype. In his view, Uber just doesn’t have a cost advantage over its competitors the way Amazon did. Amazon saved money by getting rid of expensive retail stores and sales clerks. In contrast, an Uber ride still requires a car, a driver, and some fuel just like a conventional taxi ride. So there isn’t much room for Uber to undercut its competitors.
> “This industry has a simple cost structure,” Horan told me in January. “Labor is about 58 percent, fuel is 9 percent, and so forth.”
> Of course, this flies in the face of many customers’ experiences. It sure seems like Uber has figured out how to provide a cleaner, faster ride at a lower fare. But Horan argues that this is entirely a reflection of the subsidies provided by Uber’s investors. Uber rides aren’t actually cheaper to provide than conventional taxi rides, Horan believes, it just seems like it because Uber is taking a loss on every ride.
> An obvious objection here is that Uber’s investors are not idiots. They know perfectly well that “lose money on every ride and make it up on volume” isn’t a viable business model. And when they made their investments, they presumably had access to internal financial data that isn’t available to the rest of us. It seems very unlikely that Uber could convince investors to give it $11 billion to continue pursuing a business model whose numbers didn’t add up.
> Horan told me Uber is accepting big losses now in an effort to drive conventional taxi companies and rivals like Lyft out of business. “Their growth is predatory,” Horan argued. “They are trying to displace more efficient producers.”
The article I linked also offers an argument against this logic, but I'm not persuaded by it.
Uber's financials are irrelevant to whether or not the ride sharing business model is sustainable.
The argument cannot be made without claiming the non-driving part of the business cannot be run for the 25% rake they take on every fare. Period. And I don't think anyone is willing to make that claim.
That doesn't mean Uber's a good investment, or Uber is doing it right, or Uber isn't pursuing monopolistic practices, or Uber isn't ripping off drivers, or that Uber isn't doing something sufficiently different that a competitor won't beat them--none of that matters.
All that matters is whether or not the business model is sustainable without burning through investor cash. That was the question. And if someone else beats them doing it while turning a profit, the business model is still sustainable.
Well, no, the article is about Uber, specifically. If you mean where I said that neither Uber nor Lyft is sustainable, then specifically what I'm referring to is operating with such low prices that rides are money-losers, aiming to raise prices after achieving total market dominance. I do not doubt that ride-sharing is a business model that can make money if prices are high enough to make the business self-sustaining, but Uber and Lyft aren't pitching themselves as such a minor variation on the traditional livery service.
> then specifically what I'm referring to is operating with such low prices that rides are money-losers
This is meaningless semantics. The business is growing and spending money to expand. That does not mean each ride is not priced profitably, or that each ride does not bring in more money than is spent providing that ride. It's just a more convoluted way of saying the business--at a high level--sells rides and is not turning a profit.
They are priced at a rate that entirely covers the driving after a 25% cut. For it to not be sustainable, it'd have to be not possible to run the rest of the business on that cut, which is difficult to imagine.
Your whole argument hinges on not understanding these concepts.
I am capable of appreciating that such a circumstance is possible, but what I have read leads me to believe that's not what's happening, and instead Uber is charging prices that do not cover their costs, with the hope of achieving monopoly. Earlier series on the subject: https://www.nakedcapitalism.com/2016/11/can-uber-ever-delive...
> By contrast, in the hundred years since the first motorized taxi, there has been no evidence of significant scale economies in the urban car service industry. That explains why successful operators never expanded to other cities and why there was no natural tendency towards concentration in individual markets. Drivers, vehicles and fuel account for 85% of urban car service costs. None of these costs decline significantly as companies grow. As the P&L data above demonstrates, Uber has not discovered a magical new way to drive down unit costs.
In the end the driver has to eat, so whatever deception Uber does on the driver pay side is not really sustainable if it doesn't in the end meet the driver market (I was a driver for 1.5 yrs)
> But it's been years now and they've got drivers, so they can't possibly be paying too far below market rate.
Sure they have drivers still...a whole lot of people who are basically just cashing out the equity on their cars today to make a couple bucks on the side.
