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I can't quite understand the economics of this rate drop (which happened only in the LA market, btw). Here's my analysis, please let me know if you see anything

by _cs2017_ 8y ago

I can't quite understand the economics of this rate drop (which happened only in the LA market, btw). Here's my analysis, please let me know if you see anything wrong with it. Uber makes 25% commission from the per-mile fee, so the total revenues to Uber and to the drivers is moving in the same direction. I assume Uber wouldn't drop the rate unless their revenue increased. So they must know that (1) the lower fee will be more than offset by the increased demand, and (2) they will have enough drivers to meet that greater demand. It must be that the total money received by all drivers will go up. So each driver will make more money before expenses (not per hour, but in total). How will Uber meet the increased demand? Sure, the drivers will be better utilized (less time without passengers), but would that really be enough? Or does Uber expect the drivers will work longer hours? I suppose it's possible that people really desperate for cash will work more even as they are paid (a lot) less. That would be both very sad and very hard to believe (since at this point McDonalds pays better than Uber, after accounting for gas and wear & tear on the car). Anyway, if somehow the hours per driver stay the same, the gross income per hour will grow. Income after expenses will grow by an even greater percentage. I really would like to understand whether the increased gross revenue per driver will come from longer hours or not.

AnthonyMouse 8y ago
You're overcomplicating it somewhat by separating things out that could reasonably just be averaged together. The real question is what the supply and demand curves look like. It's possible for everyone to make more money by reducing prices and making it up on volume, if that's what happens. If you're a driver and you currently spend a lot of time sitting around waiting for riders, and the lower prices reduce that wasteful idle time, you can end up making more money, even working the same number of hours, by driving more miles in the same number of hours. But that's assuming the lower prices spur sufficient additional demand to compensate for the lower rate per mile, which is going to depend on the specifics of the local market.
- _cs2017_ 8y ago
  I agree with you. I guess I'm asking how likely is the (quite appealing) scenario you describe? The volume increase will more than offset the price drop -- otherwise Uber would have no incentive to drop the price in the first place. What else do we need to know to predict the outcome on drivers pay?
  - AnthonyMouse 8y ago
    Predicting this kind of stuff is a rabbit hole. Suppose there is a strip of struggling restaurants downtown in an area with insufficient parking, so that your ride service is the best way to get there. If you lower prices by $.10/mile, you just lose money. If you lower prices by $.20/mile, the lower transportation cost allows the restaurants get enough new customers that they can make improvements, and then the restaurant improvements attract even more customers. Those customers are also your customers, and having many customers going to and from the same small area is your best case scenario because it allows you to pick up and drop off in the same place at the same time, so then you make more money too. It's generally easier to just try it and see what happens, and then deduce the how from the what. Note however that this will not necessarily be the same thing that happens in another area or at another time, because of all the things that can be different and affect the outcome.
    - _cs2017_ 8y ago
      If Uber was not reasonably confident in their predictive models, they'd be shifting rates by like 1% per week to test the waters, instead of 25% in a day. And if Uber can have good predictive models, maybe independent economists who study this market could make somewhat decent predictions as well.

AnthonyMouse 8y ago

You're overcomplicating it somewhat by separating things out that could reasonably just be averaged together. The real question is what the supply and demand curves look like. It's possible for everyone to make more money by reducing prices and making it up on volume, if that's what happens. If you're a driver and you currently spend a lot of time sitting around waiting for riders, and the lower prices reduce that wasteful idle time, you can end up making more money, even working the same number of hours, by driving more miles in the same number of hours. But that's assuming the lower prices spur sufficient additional demand to compensate for the lower rate per mile, which is going to depend on the specifics of the local market.

_cs2017_ 8y ago
I agree with you. I guess I'm asking how likely is the (quite appealing) scenario you describe? The volume increase will more than offset the price drop -- otherwise Uber would have no incentive to drop the price in the first place. What else do we need to know to predict the outcome on drivers pay?
- AnthonyMouse 8y ago
  Predicting this kind of stuff is a rabbit hole. Suppose there is a strip of struggling restaurants downtown in an area with insufficient parking, so that your ride service is the best way to get there. If you lower prices by $.10/mile, you just lose money. If you lower prices by $.20/mile, the lower transportation cost allows the restaurants get enough new customers that they can make improvements, and then the restaurant improvements attract even more customers. Those customers are also your customers, and having many customers going to and from the same small area is your best case scenario because it allows you to pick up and drop off in the same place at the same time, so then you make more money too. It's generally easier to just try it and see what happens, and then deduce the how from the what. Note however that this will not necessarily be the same thing that happens in another area or at another time, because of all the things that can be different and affect the outcome.
  - _cs2017_ 8y ago
    If Uber was not reasonably confident in their predictive models, they'd be shifting rates by like 1% per week to test the waters, instead of 25% in a day. And if Uber can have good predictive models, maybe independent economists who study this market could make somewhat decent predictions as well.