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Is that actually how it works? Not having used Uber, my understanding based on articles is that it does not work like an order book at an exchange, where the pr

Is that actually how it works? Not having used Uber, my understanding based on articles is that it does not work like an order book at an exchange, where the price is determined by where buy and sell offers cross. Instead, Uber basically dictates the price, and then whoever is happy with that price will be matched. Correct me if this understanding is wrong. What this means is that, as a first approximation, it is Uber that sets the price, not "the market" (whatever that is). Obviously, Uber still needs to take into account how both drivers and passengers react to the prices, but those are second order effects, and the resulting price is quite likely to be different from what you would get with a neutral platform that simply matches order books. In the end, I guess this all boils down to the truism that "the market" does not exist. There are many, many different markets, all somehow defined by the rules society sets up for them, and the resulting prices and relative benefits to participants necessarily depends on those rules.

shabadoop 13y ago
>What this means is that, as a first approximation, it is Uber that sets the price, not "the market" (whatever that is). The market is the aggregate of all other people providing a similar service. Taxi companies, other Uber-like services, are all competing for the same consumers. If Uber is setting its prices too high, they'll lose customers to the aforementioned competitors and they'll potentially earn less money if the higher price doesn't offset the drop in customers. That's what people mean when they say "the market sets the price". I'm sorry, it just sounds like you're giving a very cliched "the market doesn't exist" response in a situation where it just doesn't apply at all. This is a market with competing firms, not a monopoly.
- nhaehnle 13y ago
  That's what people mean when they say "the market sets the price". I know that that's what people mean. What I'm saying is that people are making a mistake by not looking at the mechanism of how "the market" works. Let us compare two worlds. World A is our world, where Uber sets the price for its drivers and passengers. World B is a world in which drivers and passengers place bids directly. Let's say that drivers' bids contain a basis price + per-km price as well as the range within which they are willing to travel, while passengers' bids contain start and end point and maximum price (perhaps with the possibility of saying "market price"). Uber then matches those bids when they cross in a manner similar to an exchange order book. What I understand from your comment is that you believe that the price for a ride in world A will be equal to the price for a ride in world B. That seems like a rather bold claim that requires an extraordinary argument to back it up. And no, the "if Uber sets prices too high/low in world A, passengers/drivers would move to competitors" argument is not sufficient, because nobody really knows what the "correct" price is exactly (what does it even mean for a price to be objectively correct? [0]). So there is a range of prices in which the loss of passengers or drivers would happen rather slowly or not at all. Where does the choice of the exact price within that range come from, and why should it be the same in both worlds? Why shouldn't Uber be able to exploit this uncertainty to increase their revenue by a few percent? Mind you, I don't know whether this would benefit drivers or passengers relative to a different world. The key point is the question of whether the worlds are the same or not - and if they're not, then it's problematic to claim that "the market" sets the price. [0] Yes, yes, it's the price where supply and demand are balanced. But how are supply and demand formed in the first place? Conceptually, people ought to have beliefs such as "a ride from A to B is worth X to me". But even if people have such beliefs, those beliefs are necessarily based on what the previously observed prices are. So at best, you get a feedback loop that goes like: observed prices -> people's beliefs about what prices should be -> supply and demand -> observed prices. They who control the mechanism that outputs the observed price are in a rather special situation to (attempt to) manipulate this feedback loop in their own interest.
pbreit 13y ago
It works exactly like an order book at an exchange except there are only market orders (no limit orders).
- nhaehnle 13y ago
  But - at least to my understanding - this means that it doesn't work at all like an exchange, because at an exchange, the price at which market orders execute ultimately comes from the limit orders in the same market. If there are no limit orders, then where does the price come from?

shabadoop 13y ago

>What this means is that, as a first approximation, it is Uber that sets the price, not "the market" (whatever that is). The market is the aggregate of all other people providing a similar service. Taxi companies, other Uber-like services, are all competing for the same consumers. If Uber is setting its prices too high, they'll lose customers to the aforementioned competitors and they'll potentially earn less money if the higher price doesn't offset the drop in customers. That's what people mean when they say "the market sets the price". I'm sorry, it just sounds like you're giving a very cliched "the market doesn't exist" response in a situation where it just doesn't apply at all. This is a market with competing firms, not a monopoly.

nhaehnle 13y ago
That's what people mean when they say "the market sets the price". I know that that's what people mean. What I'm saying is that people are making a mistake by not looking at the mechanism of how "the market" works. Let us compare two worlds. World A is our world, where Uber sets the price for its drivers and passengers. World B is a world in which drivers and passengers place bids directly. Let's say that drivers' bids contain a basis price + per-km price as well as the range within which they are willing to travel, while passengers' bids contain start and end point and maximum price (perhaps with the possibility of saying "market price"). Uber then matches those bids when they cross in a manner similar to an exchange order book. What I understand from your comment is that you believe that the price for a ride in world A will be equal to the price for a ride in world B. That seems like a rather bold claim that requires an extraordinary argument to back it up. And no, the "if Uber sets prices too high/low in world A, passengers/drivers would move to competitors" argument is not sufficient, because nobody really knows what the "correct" price is exactly (what does it even mean for a price to be objectively correct? [0]). So there is a range of prices in which the loss of passengers or drivers would happen rather slowly or not at all. Where does the choice of the exact price within that range come from, and why should it be the same in both worlds? Why shouldn't Uber be able to exploit this uncertainty to increase their revenue by a few percent? Mind you, I don't know whether this would benefit drivers or passengers relative to a different world. The key point is the question of whether the worlds are the same or not - and if they're not, then it's problematic to claim that "the market" sets the price. [0] Yes, yes, it's the price where supply and demand are balanced. But how are supply and demand formed in the first place? Conceptually, people ought to have beliefs such as "a ride from A to B is worth X to me". But even if people have such beliefs, those beliefs are necessarily based on what the previously observed prices are. So at best, you get a feedback loop that goes like: observed prices -> people's beliefs about what prices should be -> supply and demand -> observed prices. They who control the mechanism that outputs the observed price are in a rather special situation to (attempt to) manipulate this feedback loop in their own interest.

pbreit 13y ago

It works exactly like an order book at an exchange except there are only market orders (no limit orders).

nhaehnle 13y ago
But - at least to my understanding - this means that it doesn't work at all like an exchange, because at an exchange, the price at which market orders execute ultimately comes from the limit orders in the same market. If there are no limit orders, then where does the price come from?