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Network effects are crucial to social networks like Twitter. But why should that apply to Uber? The network effect on Twitter etc. comes from the fact that each

Network effects are crucial to social networks like Twitter. But why should that apply to Uber? The network effect on Twitter etc. comes from the fact that each additional user increases value for existing users. But Uber is a two-sided market, and while each additional driver benefits existing riders they are also additional competition for existing drivers.

abakker 7y ago
Network effect for Uber is having the app installed. It is more comparable to a central market for a single, homogenous good.
FabHK 7y ago
The article makes that point, too: > [Uber etc.] also have none of the Facebook-type network effects (following what is known as “Metcalfe’s Law”), by which each new user makes the network more valuable to all other users, which makes it nearly impossible for smaller competitors to survive. However, I think that's wrong. If I'm in a city with two "ride sharing" companies, but one has twice as many cars on the road, I'd expect to wait longer for a taxi from the company with fewer cars, right (or, if I check both, most of the time the one with more cars will show a shorter waiting time). Thus, as a customer I'd be inclined to choose the one with more cars.
- amelius 7y ago
  But shouldn't most drivers be working for both companies? I mean it was recently decided that uber drivers are contractors (not employees), so they should be free to do that.
- sweeneyrod 7y ago
  Yep, but all else being equal you would also choose the one with fewer other customers. So in terms of the first-order effects, each additional user (as in, rider not driver) actually makes things worse for existing users! There's the secondary effect that each additional user encourages more drivers to sign up, but while this might compensate for the first-order effect it's not going to overcompensate. For another perspective, you can look at things empirically. Has Uber used network effect to dominate the market and force out competitors? No; Lyft, traditional taxis, and foreign ride-sharing companies are still around. To the extent that Uber is winning, it's because it has a better product (for a definition of better that includes burning VC money to lower prices). Contrast this with Facebook: the only major similar product in recent history is Google+, which died pretty quickly. All other successful social networks differentiate themselves in some way, because they have to.
menzoic 7y ago
Drivers don't really compete with each other. Maybe in some extreme future case, but its hard to imagine driver/rider ratio going out of control. So far more drivers just means lower ETAs which means more riders.

abakker 7y ago

Network effect for Uber is having the app installed. It is more comparable to a central market for a single, homogenous good.

FabHK 7y ago

The article makes that point, too: > [Uber etc.] also have none of the Facebook-type network effects (following what is known as “Metcalfe’s Law”), by which each new user makes the network more valuable to all other users, which makes it nearly impossible for smaller competitors to survive. However, I think that's wrong. If I'm in a city with two "ride sharing" companies, but one has twice as many cars on the road, I'd expect to wait longer for a taxi from the company with fewer cars, right (or, if I check both, most of the time the one with more cars will show a shorter waiting time). Thus, as a customer I'd be inclined to choose the one with more cars.

amelius 7y ago
But shouldn't most drivers be working for both companies? I mean it was recently decided that uber drivers are contractors (not employees), so they should be free to do that.
sweeneyrod 7y ago
Yep, but all else being equal you would also choose the one with fewer other customers. So in terms of the first-order effects, each additional user (as in, rider not driver) actually makes things worse for existing users! There's the secondary effect that each additional user encourages more drivers to sign up, but while this might compensate for the first-order effect it's not going to overcompensate. For another perspective, you can look at things empirically. Has Uber used network effect to dominate the market and force out competitors? No; Lyft, traditional taxis, and foreign ride-sharing companies are still around. To the extent that Uber is winning, it's because it has a better product (for a definition of better that includes burning VC money to lower prices). Contrast this with Facebook: the only major similar product in recent history is Google+, which died pretty quickly. All other successful social networks differentiate themselves in some way, because they have to.

menzoic 7y ago

Drivers don't really compete with each other. Maybe in some extreme future case, but its hard to imagine driver/rider ratio going out of control. So far more drivers just means lower ETAs which means more riders.