Analyze the market before the entry of Uber. Describe the inefficiency Uber exploited.
Uber is a technology company in the transport sector. It is an application that connects passengers to drivers who have a contract with Uber. One of the necessities in ordering a vehicle is one must own a smartphone and register within the mobile application by giving details of your name, your cell phone number, an email address, and a credit card that can be easily billed automatically when the ride comes to an end. Your smartphone global positioning helps in the easy determination of your location and pick up address when giving an order. This address appears on the nearest driver’s smartphone application and he or she can either accept or reject the ride. The market before the entry of Uber was the use of Lyft and taxi services. Lyft app was launched in 2012 but originally called Uber cab in the year 2009. Zimrides was started as a side project for Lyft, a carpooling service that was started with the need to leverage Facebook and students who were on the long distances which were used as a ride-sharing when Uber was limousine gleam shaped. The first regulatory window in San Francisco was provided by the Lyft team with a purpose to test the sharing of rides, this was considered illegal for any other driver who operated and had no taxi license. In 2017, Uber entered the market and for the first two months, Uber drivers earned a total of $50 million before the business got adjusted for better performance.
Uber exploited the risk posed to passengers. Uber has talked with unauthorized drivers by exploiting the loophole. This was uninsured as a result of the journeys made and a number of them took place with drivers who did not hold any form of a private hire driver license including one who had his license revoked. Facial recognition is one of the inefficiencies that has been exploited by Uber. Uber has made a number of changes to its processes and features in the app. They have introduced security and privacy training for drivers as well as emergency assistance support and the passenger’s ability to share their journey with trusted contracts. They have also introduced tougher rules in regards to driver insurance checks.
Explain Uber’s surging pricing in the contexts of shifts of supply and demand.
Uber drivers are always paid in accordance with distance and time of a given trip and the rate of Uber fare in operation during the time they are with passengers. Surge pricing is a system that determines the Uber’s fare rates and it charges to a higher rate when many passengers are seeking service. Using Uber creates high demand in the market then there is a rise in fare prices. This happens during the busy days but during regular times, fare prices are always the same and do not change. In many cases, there are a lot of riders who try booking a cab on Uber more than the number of available drivers. This brought changes in Uber Company by employing the surge pricing algorithm in order to meet the equilibrium state of demand and supply. When the demand is high, Uber employs surge pricing allowing more drivers to come up for the job. Prices are used to signal drivers in an economic theory which is a good way in influencing the supply status by inducing more drivers to get on the road to help them meet the new demand. When surge pricing kicks in, it gives a signal to the drivers that it is such a valuable time for them to be on the road while the riders seeking Uber rides services can get one which might be at a higher price and some of the riders have an option of choosing not to and maybe they can seek other options.
Diagram 1 below shows when the demand and supply are at regular levels. When all riders open up the app and can request a ride and they are able to get one within a reasonable time compared to any other time, then the equilibrium price and quantity are at e and the price remains constant as P.
In the second diagram below, diagram 2, shows the high demand around 12.30 am on NYE. The demand curve tends to shift out from D to D’.The price rises from P to P due to a kick in the surge price. Drivers are then induced to drive since there is more supply of drivers in the Uber market and the supply tends to expand along the supply curve(S) which brings out a new equilibrium e”. When e’ tends not to be at a stable equilibrium, this could be due to some of the drivers not responding to the signal of the price as they are all aware that surge prices do not last even for a night. For such a case, along the curve there happens to have expansion in the rate of supply thus not all the Uber drivers will accept the surged price willingly, since others may opt-out of the demand levels and get to choose other terms and options given to them. The demand curve may be between D and D meaning that the equilibria is unstable and will hover between e and e.
The 3rd diagram below shows when there are more drivers on the road the surge price ends and the price level will definitely return to the earlier level of P, but then the supply level does not fall back to the level before. There is a reduced opportunity cost of driving and the drivers take longer periods on the road. When surge pricing comes to an end, there is a high tendency of more drivers to stay in the market by remaining on the road rather than leaving the market. Under this case, the new supply curve and the new equilibrium are at S and e’ respectively.
Evaluate Uber’s surge pricing in the context of price discrimination.
When a certain firm sells a service or a good to different buyers, two or more different prices with reasons not necessarily associated with cost terms then there is an occurrence of price discrimination in this state. This makes the firm receive a higher level of revenue. In price discrimination, there are conditions to be followed. Uber must be able to control the level of supply, they must prevent re-selling of goods and services from one buyer to another and there must be a clear difference in the elasticities of price in the different markets for Uber transportation. Uber’s surge pricing in the context of price discrimination is an increase in the rates of Uber getting more cars on the road to ensure there is reliability during the times they are very busy, when there are enough cars on the road, the charge rates go back to normal levels. An increase in the price of Uber rides gets to motivate more drivers to get busy with their work until when the supply level comes to a comfortable level. This causes the exploitation of people during holiday times or when they have emergencies. Uber can service a wide range of customers of varied income by creating multiple lines of services that do perform similar tasks and functions.
Apply the concept of economies of scale and economies of scope to Uber’s business model.
Economies of scale are defined as the cost advantages that are reaped by the Uber business when the production becomes efficient. Uber’s business has achieved the economies of scale by increasing the level of production in the market that is getting more drivers and cars and lowering the costs such as pricing. Costs can either be fixed or varied but then the size of the business generally matters when it comes to economies of scale. When the business gets larger, then there are more cost savings. Economies of scale can be internal or external. Internal economies of scale are based upon the Uber business management decisions while the external ones deal with the outside factors. They are important in the business since they do represent the cost savings as well as the competitive advantages that larger businesses have over the small ones. Economies of scale in the Uber business gives more rise to lower per-unit costs. This is due to the specialization of labor and the advanced technology of apps in smartphones thus boosting the production volumes. Lower per-unit costs can either come from the suppliers of bulk orders, the advertising buys being larger or by way of lowering cost of capital. Uber’s business models and the internal functions of the economies of scale include; information technology, marketing and accounting. They are considered efficiencies and synergies. When a company costs are cut internally, then the internal economies of scale are considered to have happened thus they are unique in relation to other firms. On the other hand, due to the external factors that do affect Uber’s business, this results in the achievement of external economies of scale in Uber’s business. This means that no company can be able to control its costs on its own. External economies of scale in business occur when there are things that can cut down on costs in a specific industry such as a highly-skilled labor pool, the occurrence of subsidies or tax reductions and joint ventures as well as partnerships.
Economies of scope are defined as the efficiencies that are formed by variety and not the volume. The expansion of Uber’s business is anticipated to come to a lower unit cost due to the economies of scope. Economies of scope are generally the economic factors that make the manufacturing of different products to be more cost-effective than being able to manufacture them on their own. This occurs because the products are then co-produced by the same process thus the process of production is complementary. Goods are complementary in production thus in the Uber business, finding a productive use or to market the co-products can increase revenue or reduce costs. Shared inputs and complimentary production processes helps the business in the economies of scope and in increasing the production rates in the business. To achieve the economies of scope, diversification is important to get a great offer of opportunities in the business. Merging or acquiring another company in Uber’s business model is also one of the ways to achieve economies of scale due to the combination of different product lines and reduction of average warehouse costs increasing the business revenue.
Apply the concepts of game theory to Uber’s markets.
Game of theory is the use of game elements such as levels, competitions with others, point-scoring levels, ratings, measurable evidence of accomplishments and the rules of play in a non-game context. Game theory is known for incentives optimum participation. One of the variable reward is to trick the brain into the anticipation of what comes next and the incentives is to continue seeking the reward. Uber doesn’t really hide these manipulations but they do rely on them. In gaming context, experts do call this sensation the ‘ludic loop ’a Latin word meaning playful. When our smartphone device elicits a shot to our system and we receive a signal, it reinforces the feeling that what we get to do is always pleasurable and very important, thus we are stimulated by the connectivity itself. Gambling uses variable reinforcements schedules which are unpredictable, full of uncertainty, anticipation and feedback in order to condition players in playing more rounds. The Game theory is addictive and in Uber reviews, using the smartphone app boosts productivity. Uber has experienced video games, graphics and rewards which are non-cash concerning the little values that can make drivers work longer and harder especially locations and hours that are less lucrative to them. The decisions engines in Uber refer to the algorithms that track, log and crunch millions of metrics of data every day, from the frequency of the rides to the driver’s brake which then delivers the drivers data profiles perfectly matched. The driver is then connected through the use of algorithms to their next ride before their current one comes to an end. In Uber case, this basically means that drivers are sent their next fare opportunity before their current ride is even over. Game theory in the Uber markets has been so successful that there are complaints of many drivers not taking a bathroom break for fear of them getting to miss the next fare. The frequency of back to back driver requests raise so many complaints which made Uber introduce a pause button.
Assess Uber’s potential for international expansion and potential trade policy issues.
Uber potential for expansion urges the need to increase the innovation terms by promoting a good infrastructure in terms of transport that is sustainable in the global development community. Uber transport has to be safe, efficient and reliable internationally and globally. Approximately 1.1. Million active drivers in Uber business platform are matched with the riders in order to be able to keep up with the demand. Uber advertises the platform which is flexible to the drivers and gives them an opportunity to be their own boss thus making them happy. Uber has partnered with the local non-governmental organizations in a need to implement the initiative including iCare life which specifically deals with training women internationally and taking them through the commercial licensing process especially in India. Uber potential for international exploitation eradicates safety concerns that can be a barrier to women’s entry. Uber is designing to incentivize women drivers internationally to use the platform of identifying the gaps that are between signing up for the service and taking the first trip. Ubers potential for international expansion is distinguishing the aggregated data between the anonymized and the personally sensitive information the company is asked to share. Many people get to have bikes, buses and their own cars around the city and this poses a threat of competition to the Uber . Chaos cannot be organized through the use of smartphone. This include the introduction of rating systems, electronic payments and the ability to have on-demand travel.
Uber’s potential for trade policy issues are one of the continuing theme in the international scene. This include the global market, trade deficits, sanctions, tariffs and the EU,WTO ,endless interest groups, organizations, treaties and trade agreements. Trade policy is defined as the enforcements and the developments of national laws agreements that are basically intended to, or have the effect of regulating the movement in the cross-border and the tradable. Rising tariffs is one of the trade policy issues. This is imposed in a number of different tariffs on the goods that are imported and justified as an attempt to make trade conditions more favorable for the United States. Intellectual property theft is also one of the major trade policy issue since it allows companies to unlawfully profit from the breakthroughs generally made by other companies. This reduces the incentive for innovation of business and results in flooding in the markets with products that are counterfeit that shouldn’t be there. It also causes competition increase leading to a decrease in Uber’s fare are reduced for the business who spent the initial research and development money to improve and develop their products.
Explain the incentive pay model Uber uses and how it affects the principal-agent problem.
Uber is a smartphone app which provides an on-demand service to the users. Uber gets 20% of the fares when they get to provide their services. The passenger’s credit card is used as the sole payment method when the passenger reaches his or her destination. Anyone with a driving license and a car in good condition can apply to be an Uber driver in any of the cities that are covered by Uber. After screening, the driver is enlisted in the Uber system and is handed an Uber iPhone that provides a steady income without investment or additional hazard. When a passenger has registered with the Uber app, it provides to them a relatively low cost and a comfortable service. Uber always set their taxi fares. During the peak hours the fare is always premium while off peak hours a flat rate is charged. Passengers have to pay through their credit cards; one doesn’t have to pay cash to the drivers. The fare is based on car types, the peak hour and the distance. Payment is secure, simply because passengers only pay via credit card and using the Uber app. The Uber fare is usually divided 80% to the driver while the rest 20% to Uber. In some of the cities, Uber reduces its percentage due to competition from similar companies such as Haio and LYFT. Due to Uber market research, it is noted that Uber needs to invest in development and research for to foster growth in future. The incentives pay model Uber uses affects the principal agent system. They do affect by incurring overhead costs and the costly legal battles that end up threatening the business. The lawsuits from Uber companies and unions in several big cities such as New York kept Uber business engaged in regular battles in the court because of Uber pay model has also affected the principal agent system since Uber is plagued with liability insurance issues as well as questions that are basically more than any other start-up services.
Discuss any asymmetrical information issues with Uber’s business models.
Asymmetrical information issues arise when one of the parties to an economic transaction has more or or better information than the other and uses that to their advantage. Asymmetrical issues do give the buyer or the seller a better opportunity in order to make a good profit from the purchases made or the sale. The information affects the performance of the business as it can lead to selection that is adverse or the moral hazards which occurs when a given party takes a risk since the risk costs won’t be felt in any other way by the party. One of the asymmetrical information issues dealing with Uber’s business models is the adverse selection. Adverse selection describes a situation in which either a seller or a buyer has information that the other group does not have. In this case there are two groups which created an asymmetrical information with different level of degrees. This occurs when one of the parties has more information than the other. It happens before the transaction takes place or there are pre-contractual problems. Adverse selection occurs when there is more information held by Uber company and they disclose while selling their cars thus people who seek insurance are more likely to need the insurance which means that the person responsible for the decision making has a poor selection. Moral hazard is also one of the asymmetrical information issues that deal with Uber’s business model. A situation whereby a party is more likely to take a risk simply because of the available costs that can result and in any other way it cannot be borne by the party taking risks is called a moral hazard. The main problem with asymmetrical information issues is that it takes place after the transaction.
In conclusion, Uber’s strategic analysis gives and indication that it is in a very strong position. Moreover, it’s one of the leading ridesharing company at the present time. Uber has also diversified its portfolio thus becoming one of the leading logistics company globally. Uber has a great deal of internal strength and the opportunities externally thus the company can easily handle external threats that may face it during its operations. One of the major areas of improvement consists of internal weakness regarding the corporate culture. It is noted that Uber should ensure that its own tech culture in any way does not come into conflict with its expectations and the values regarding the clients and the customers company.