Uber, as a business, models off of a pure competition market—but even individual Uber drivers themselves are their own businesses that have to compete with each other. The cars providing Uber services embody characteristics of perfect competition and are price takers: many small firms, identical products, no barriers to entry, no control over the price, no economic profit in long run, and efficient. There is no option for differentiation through advertising or technological superiority when they’re all relying on the same app to communicate. Specifically, when there’s a surplus of drivers in a concentrated area and they’re all offering the same services in that one area of location, it creates competition.
Shifts in the demand and supply curve are constantly occurring, caused by the fluctuating number of consumers—or Uber riders in this case which causes changes in demand—as well as the number of producers—or Uber drivers in this case which causes changes in supply. When the number of drivers in the market keep increasing, so does the marginal cost and the opportunity cost of that time and money. Especially as Lyft enters the market and tries to grow to outcompete Uber, it keeps throwing money at its drivers. This is backfiring and having a counter effect whereas as money increases, so does the amount of time that drivers sit around. This leads to less money for each driver. Instead, the matching of passengers with drivers needs to be at an ideal amount where there’s not an excess of drivers nor a lack of riders; otherwise both companies risks losing potential profit where each additional driver or quantity of labor are creating opportunity losses. So while both these companies are spending a lot of money to build their networks and expand in the short-run, the long-term is becoming harder to predict. They needs to find a way to provide stable paychecks and steady incomes if they want to keep their drivers. And keep them satisfied.
Just like the nature of the Marginal Cost trend line where productivity is affected by the overcrowding of too many employees that can lead to bringing down efficiency levels, Uber needs to start functioning at allocative efficiency by producing the optimal quantity of Uber drivers that society, or Uber riders, want.
Great post Aditi! I thought you did a great job of illustrating how Uber is in a purely competitive market, helping me to better understand the concept. Something else I thought about while reading your post was how Uber also provides a great example of how price will change with the demand for a product when supply remains the same or how supply will increase when demand is high. The surge pricing for Uber that goes into effect on big holidays like New Year's Eve and St. Patricks day demonstrate how price will shift in order to maximize profits when the demand for rides is very high. It also shows how there will often be more Uber drivers willing to meet this high demand because of the increased rates, even though there will not be enough drivers to affect the pricing of the rides.
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