Transportation Startups and Rent-Seeking

Matthew Yglesias advocates for making UberX legal, which is clearly the right thing to do.  But in reading the comments to his post, I wondered how much of the value of Uber and yet more so Lyft (or similar ride-sharing services) comes not from the intrinsic desirability of their service, but from arbitraging existing rent-seeking.

That is, let’s take it as written that at least in many cities in the West, supply of taxis is artificially constrained, and thus the price of taxis is artificially boosted, and that rent is captured by someone (probably mostly a combination of banks, taxi fleets, and governments — driving a taxi is not typically a route to riches).  Uber, Lyft, etc. offer an end-run around the artificial monopolies.

But they also benefit from those monopolies.  Let’s say that the market-clearing price of a given taxi ride is $15, but rents increase it to $20.  Uber can offer a $18 ride, and still profit — but if the monopolies were swept away and the price of the ride  reverted to the clearing price of $15, Uber’s $18 ride is suddenly no bargain at all.  (There are a variety of stories you can tell here that are variations on this: getting a ride at all, etc.)

That dynamic clearly functions, and gives Uber and other transportation startups an advantage.  But they also offer intrinsic value: the experience of hailing a ride from your smartphone has value independent of the arbitrage possibilities.  The question is, how much of the value is in each bucket?

Uber and its peers are almost certainly going to lead to a liberalization of taxi regulation in many cities.  When they do so, they will find themselves in a much tougher market.  It will be interesting to see where that goes.

Meanwhile, the other big inefficiency in the taxi market is not addressed (much) by Uber, but Lyft may have an answer, which is elasticity of supply.  The taxi market is such that there are major demand swings (for example, Friday and Saturday nights are disproportionately high demand, and irregular holidays such as New Year’s Eve, Hallowe’en, and St Patrick’s Day also push a lot of demand.  Weather can change demand markedly, and sporting events dramatically change the landscape of a typical night), but supply has traditionally been fairly inelastic.  In part, this is because taxi medallions impose an artificially fixed supply, but it’s also simply that a dedicated car as a taxi is a big investment, and it needs to be paid off by fairly sustainable business.

Which is to say, if you were a taxi driver who only worked New Year’s Eve, Hallowe’en, and St Patrick’s day, you’d get great profits on those nights, but you wouldn’t be able to afford your $15,000 – $30,000 car just based on those three nights.  And there are plenty of reasons why you need to have a car with special paint jobs etc. to pick up street hails, but you can’t use that car for everyday driving.

If, on the other hand, you have a $15,000-$30,000 car that is paid for by your day job, but are looking to make a few hundred extra bucks a year, being a Lyft driver on NYE, Hallowe’en, and St. Patrick’s Day suddenly looks a whole lot more possible.

In this way, I’d say that Lyft has a brighter future in a post-monopoly-busted transportation world than does Uber.  But counterbalancing that, they have a much rougher legal battle in the present.

Disclosure:  I work for a transportation startup, Flywheel.  The opinions expressed here are not those of my employer.

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One thought on “Transportation Startups and Rent-Seeking

  1. Pingback: Nobody needs Christmas Trees on Demand | Sandor at the Zoo

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