Uber-economics

Today, on the 30/ 01/ 2016 I write my first blog post. I have been wanting to blog for a while now and apparently, one of the best ways to revise some concepts is to write about them. Thats brings us here: Uber.

Uber, the ride-sharing Company/App fascinates me for numerous reasons related to Microeconomics. You have so many Economic theories interacting through Ubers Model of operation; Monopoly, Supply & Demand, Mergers, Perfect Competition, and Price Leaderships/Wars to name a few. All this is actually happening in the real world. So, today I’ll like to throw some light on one of the most recent development to have emerged between Uber and their close rival in the USA, Lyft; Price Wars.

Price Wars
The Price War between Uber and their competitor Lyft increased recently. Uber, the price leader announced on January 8, 2016 that they were cutting prices in a number of US States: 

Five and a half years in, we’ve learned that the single most effective way to boost demand during the winter slump is to cut prices for riders. Starting tomorrow—just like last year and the year before—we’re cutting prices in more than 100 US and Canadian cities, giving riders one more reason to head out of the house, ditch their keys, and avoid parking. Higher demand means more time moving people, less time spent waiting around and more money for drivers. And if drivers aren’t busier, prices will go back up again. In addition, we are guaranteeing earnings for drivers to ensure that no one is disadvantaged. That’s 24/7 incentives to put drivers at ease.

This is an attempt by Uber, to win greater share of the market from Ubers competitor, Lyft. In response, Lyft also cut prices to avoid losing market shares to Uber:

Lowering prices during a seasonally slow time, like the cold winter months, helps us make sure you can always get safe, affordable rides wherever you’re going

Ubers, in effect, is the Price Leader, because when they reduce prices, their fringe competitors like Lyft, are compelled to follow, or risk losing their customer base.

This race to the bottom in terms of pricing between Uber and Lyft is interesting because it cannot go on forever. Uber, as a Price Leader is in the position to make huge losses to make the ride-sharing industry unprofitable for its competitiors by employing what is known as Limit Pricing. Through limit pricing, Uber will charge very low prices which makes the ride-sharing industry unprofitable for everyone in the industry until they are forced to exit and it also discourages other ride-sharing companies from entering the market to compete. You might be asking yourself “Won’t it be also unprofitable for Uber?”. No. Uber has *deep* pockets where they can incur huge amount of losses just to drive their competitors out of business. In effect, they are willing to incur short run losses for long run profit, because in the long run, the limit pricing strategy will make them a Monopoly in which they could re-adjust prices by increasing to increase their profit margins.

Lyft, in an attempt to still stay competitive, has merged with other ride-sharing companies such as Didi Kuaidi to match Uber globally. This merger so far has not bared an fruits but it should get interesting from this point onward.

From time to time, I will write about other developments between Uber and Lyft, in terms of economics. I have big plans for my blog. I’m very grateful If you read to this far. Thank you and stay tuned!

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