Recently I’ve been thinking how ride-sharing companies like Uber and Lyft burn heaps of cash every year yet their drivers barely break even on their investment(time and capital). How a company which is just supposed to be a platform to connect riders and drivers ends up deciding how much a ride will cost , what route the driver would take and how much a driver would earn meanwhile loosing billions of dollars of it’s investors money(and confidence). To me this resembles the same top down approach we see communist countries and centrally planned economies using – Central control of prices by a few bureaucrats or in this case Uber’s machine learning algorithms and loosing billions of dollars and wrecking the economy in the meantime.
Here’s my naive free market take on how to solve this –
Let the drivers individually decide how much they’ll charge per kilometer of the trip. Offer them viable routes for the destination but don’t force it upon them. Let them decide what surge price will be. Make them aware of the average rates in their area but make no decesion on behalf of them. On the rider side offer a slider between driverRatings and rideCost and let the rider decide what’s best for them. Use riders preference to match them with suitable driver with suitable price:rating ratio.
The market competition will keep the drivers from charging outlandish prices or offering poor service. The company (here Uber) will reduce it’s role to just a marketplace with zero (or .5%) commission of the driver earning or a (1%) charge on cashless transactions. It will again be a internet marketplace company like eBay and not subsidize riders at the expense of investors and/or drivers.
If we compare Uber’s biz model to similar service Sharing companies like Airbnb we can see Uber’s interventionist nature backfiring. Airbnb made ~100m in profit last year. I agree that the hotel and transportation/ride-sharing biz models are not identical but they are similar enough for this comparison. Airbnb does not decide the booking cost for home owners.
Whatever the solution, if Uber continued to burn money like there’s no tommorow there may very well not be one for the company. It will end up like many other communist interventionist states and will eventually run of other people’s (investors) money.
Further readings on how Uber’s algorithms works and how Uber and Lyft IPO (s) are underperforming
https://www.cbinsights.com/research/report/how-uber-makes-money/ ~Good write-up on business model.
https://capitalistexploits.at/hold-my-beer/ ~How(and why) SoftBank is able to write checks this big.