Friday, August 12, 2016

Uber and Lyft's Low Prices Won't Last Forever

Besides its convenience factor, a user's ability to rate their drivers, and the inherent safety that comes with the app tracking your motion along a pre-determined route, Uber has attracted so many customers in large part due to its subsidized pricing. Over the years, Uber has aggressively pushed to become the leader in the ride-sharing market. To do so, they have often offered prices that are discounted to such an extent that the company sinks billions of dollars into the app each year. While it may seem counter-intuitive to lose money, Uber is actually proceeding exactly as planned: they are focusing first on acquiring customers and forcing out any competitors before they try to turn a profit. Tracy Lien, in her L.A. Times article, addresses Uber's plan and describes how such a monopoly might affect the market.

Uber and Lyft, the most popular ride-sharing services, both know that the fastest way to get loyal customers id to give them a cheaper alternative to taxis. While many consumers still prefer taking a taxi over using one of the ride-sharing apps, most people care more about saving some money. Fortunately for consumers, the ride-sharing apps are not only competing against taxis, they are also competing against each other, which has allowed prices to fall even lower. Eventually, though, as economists have reiterated time and again, when one of the companies gains control of the market, their prices will go up. Maybe it will be slow at first, but it is a law of economics that if one company is the only source of a good or service, consumers are either forced to pay whatever price the company sets or live without it.

Uber is currently valued at over $62 billion, and is by far the market leader, even though they continuously lose money or barely break even in their attempt to grow their market share. While Lyft is in second place, they also have plenty of money to burn, especially after a recent $500 million investment by General Motors. In fact, while Lyft is falling behind Uber in most areas, they have nearly half of the market share in their hometown of San Francisco. It's possible that Uber won't be able to force Lyft out of the competition in the long-run, or they may find that the attempt would be too costly to be economical. However, economists still worry about what might happen if Lyft and other competitors were forced to back out.

Uber just lost a battle in China to become the main provider of ride-sharing services. That loss could lead Uber to focus on the US and Europe more closely and work harder on taking as much market share as possible. Therefore, it is believed that their prices will go even lower in the near future. If they can keep their prices low enough for a long enough time, they may be able to gain enough customers to be unstoppable. Some economists believe that Uber should look toward becoming more valuable to the consumer rather than a cheaper option. The Premier options in ride-sharing apps attract upper-class customers, which could be a substantial source of boosted income for Uber, even if they don't succeed in encapsulating the entire market.

While it is likely that all of the ride-sharers will eventually start raising prices in the future, there are several reasons why they wouldn't suddenly shoot up to exorbitant rates. First, there are anti-trust laws and similar regulations on how much a company can charge for a product or service, especially if that company is one of only a few providers. Additionally, if Uber or Lyft suddenly started charging extremely high prices, their customers would just switch to taking taxis. So, whatever happens with their market share, economic theory would tell us that the ride-sharing apps would steer away from charging more than taxis unless they somehow found a way to remove that competitor entirely, which is unlikely.

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