UBER: A Case Study in Supply and Demand

 

You are missing out if you have not tried Uber or Lyft. They are the easiest, most convenient, and least expensive way to get a ride. In case you missed it, check out this article on Uber that we wrote last year. I will refer only to Uber throughout the rest of this article because I am most familiar with their services, but Lyft has its share of fans and has recently gained marketshare from Uber.

Are lower prices a good thing?

My ride to the airport was $20 the first time I used Uber. I was thrilled since my previous taxi ride along the same route had cost me almost $50. I started using the service fairly regularly, and I always ask the drivers whether they like their jobs and are making decent money. The answer has always been “Yes” and “Yes.” Uber then sent me an email to let me know the “good news”—it was dropping its prices. Another email followed a few months later with the same message. My ride to the airport is now around $16, but the drivers are not as happy. Uber drivers are independent contractors who drive their own cars, pay their own expenses (gas, maintenance, insurance), and do not receive any guaranteed income or benefits. They receive 70-80% of the fare.

How much do Uber drivers earn?

I was always a bit skeptical when Uber drivers would tell me how much they made. I figured that they must be underestimating their expenses. Turns out I was right, at least according to a recent article on CNBC.com. The figures in the article were based on Uber’s own price modeling data, which was leaked to BuzzFeed. The average earnings per driver varied considerably by city. The data indicated that drivers earned an average of $8.77 per hour in Detroit, $10.75 in Houston, and $13.17 in Denver. The drivers also earn some tips, which are not included in the above figures. Tipping is not encouraged by the company, but drivers sure appreciate them. (Check out our article on the history of tipping).

All earnings are after expenses, which were estimated by the company based on the following assumptions (which seem low to me):

  • Contractors drive a $16,000 vehicle, which has a 250,000-mile lifetime, resulting in depreciation costs of 6.4 cents per mile.
  • Gas costs drivers $1.75 per gallon (last year’s price), and the vehicle gets 25 miles per gallon of gas, resulting in gas costs of 7 cents per mile.
  • Insurance, maintenance, and miscellaneous costs add up to $3,000 per year, or $1.50 per hour if the contractor drives 40 hours per week, 50 weeks per year.

I always figured that I could become a billionaire if I could just figure out a business that harnessed the talents and work ethic of all of the stay-at-home moms, retirees who want to work part-time, and underemployed who want to moonlight to make ends meet. Such a company would have to provide a valuable service and enable team members to work flexible hours. Sadly, I never came up with such an idea, but Uber did. It came up with the perfect business model, and the rest is history. The company is now worth more than General Motors.

UBER: A Case Study in Supply and Demand

Uber – the ultimate case study of supply and demand:

The flexibility of being an Uber driver led to a seemingly endless supply of people who wanted to drive for them. In a free market economy, when supply goes up, prices fall. The corollary of that is, when prices fall too low, fewer people are willing to do the work, so prices go back up. That’s what Uber calls surge pricing, a temporary increase in price that has been happening much more frequently. I am a big proponent of free markets, but personally, I wish Uber would just leave its prices high enough that there would be enough drivers and it is a fair deal for everyone.

That being said, low earnings are not the worst thing that could happen for drivers. Free markets are known to give birth to new technologies that put previous industries out of business. Just as Uber decimated the taxi business in many cities, so now the company is already working on putting itself out of business (or at least its drivers). It is one of the many companies investing billions to develop self-driving cars. When that technology is deployed, it will be time for someone else to come up with an idea that employs Uber’s army of independent contractors who are ready, willing, and able to supply flexible part-time labor.