Economic Analysis of Uber

Case Study: Economic Analysis of Uber

183ECON-207A

October 31st, 2018

1. Introduction

Founded in 2009, Uber now has become one of the leaders in ride-sharing industry. Its services cover almost every corner of the world. Starting in San Francisco, Uber is now reaching out internationally, from London, to Sydney, and now its services appear in over 60 countries and over 400 cities.

Uber is dominating the U.S. market with its marketing and strategy. In this paper, we will examine the factors that make Uber shine. This report includes three parts: introduction of Uber, success factors and insights behind Uber’s acquisition of a start-up named JUMP.

1. Introduction of Uber and ride-sharing market

Uber was founded in 2009 and is providing car-sharing platform service for customers to solve the difficulty to find taxis in terrible weathers. This service belongs to the ride-sharing market. In this market, main players include Uber, Lyft, Grab and Curb and Uber is the leader of the industry, taking up about 70% of market share. Uber is facing monopolistic competition. A monopolistic market means that there are many sellers and buyers with differentiated products, and it is relatively free to enter and exit the market. In the rider-sharing industry, technology can be considered as a barrier for entering. Also, companies have to keep competitive by advertising and branding strategies.

Uber has both direct substitutions and indirect substitutions. Direct substitutes are defined as platforms providing similar services such as Lyft, Grab and Curb. They are all providing ride-sharing service with app and their operation pattern are similar. Indirect substitutes include private transportation such as private cars, and public transportation such as taxi and bus.

Compared with other direct competitors, Uber is using surge-pricing method to maximize revenue. However, this method means that the price of toll is highly related to the demand. Consumers prefer to use the one with more drivers and lower price, and the switch cost is nearly zero. Therefore, the price elasticity is huge. Although Uber’s company size makes itself stand out in the competition, thus has more pricing power in the market. But according to the Monopoly competition theories, when Uber increases its price slightly, it would lose a large market share and suffer a loss of revenue. Therefore, it is necessary for Uber to decide whether setting high price or pursing more customers.

1. Success factors

As we have discussed before, Uber has become one of the biggest brands in ride-sharing industry. With its own strategy to differentiate itself from the other competitors in the industry, Uber has gained so much success in this industry.

1. Demand Side

3.1.1 Problems with traditional taxis

A lot of problems are arising for traditional taxi now. Firstly, the traditional taxi fail to fulfill the market demand, that means the taxi supply is in shortage. Moreover, customers can only get to know they need to pay at the end of the trip, and the driver may use information asymmetry to choose a longer ways to destination, which causing higher price. In addition, rarely do taxi industry have a platform to collect feedback and fis all these problems.