Economic Analysis of Business Practice
Are profits eroding or wealth being created? As pointed out in the New Yorker (Widdecombe, 2015), Uber is setting up an option for those in need of transportation. The Uber alternative provides an affordable option for those seeking an affordable alternative to mass transit. Mass Transit is not always desirable and the existing taxi system may not be affordable. The existing taxi system includes taxes and fee that support the NYC M.T.A. (Widdecombe, 2015). This support to mass transit translates into eighty five million dollars per year. This tax is destroying wealth that could be in the hands of Uber or existing taxi owners and operators. The cost, consequences and use of mass transit would be faced with a budget shortfall, hurting thousands of people and business annually, but wealth would be created for the new Uber drivers and the same smart phone app developers.
Uber will be history when enough people get maimed or killed by Uber drivers who failed to carry enough liability insurance. Does anyone really believe Uber drivers are insured up to their eyeballs like Yellow Cab drivers? Uber, Lyft, airbnb are creating great wealth for the meme hustlers in Silicon Valley and their investors while exploiting people through the feel-good idea if the so-called shared economy. -SC
Uber has, in New York City and across the globe, changed the way that taxi service is viewed. By using technology to essentially hire a driver from afar, it’s adapted the definition of a taxi. In The New York Post, Campanile and Fredericks describe the recent win by Uber in a Queens court. A judge ruled that the definition of a taxi’s service includes an immediate and in person desire for a taxi, and it is this service that taxi medallions are for. The purpose of a taxi medallion has been more narrowly defined in New York City, and by using technology to essentially “call” a driver, Uber is avoiding the concept of medallions. Thus, they have become less expensive. As noted by another commenter, the standards for a taxi with a medallion versus an Uber driver are different in insurance and regulation. Changing the definition of the essential service and adapting technology to fit is less changing a barrier to entry into a market and more going around to find the hole in the fence and exploiting it. http://nypost.com/2015/09/09/city-judge-rules-against-medallion-owners-in-win-for-uber/
Uber, an innovative competitor, created a way of conducting business that changed an entire industry within transportation. Consumers want everything “now”. This iconic organization starting in San Francisco learned that concept early and wanted to provide that service for all consumers. This is evident by an additional fund-raising for further capital to further expand the company (Picker et al., 2015). The organization created a substitute to the traditional taxi experience utilizing GPS tracking to find its consumers. A brilliant idea that will continue to eat away at the margins of taxi companies across America; however, will this be short lived, as eventual barriers of entry will be lifted?The likely answer is yes depending on your definition of short-term or long-term (related to years). As other competitors seek newer technologies to compete, Uber will find itself becoming stagnant or potentially losing growth future as other competitors enter the scene. Customers seek a great experience but at an affordable price. If the price becomes too expensive, the customer will seek other services, as transportation is highly elastic. As Froeb et al. (2014) states, businesses will eventually level off and have an average gain. For example, Uber is experiencing short-term success and large gains, which will eventually subside like most companies in history. Tangel et al (2015) from the Wall Street Journal suggests that more customers are entering the marketplace as well as taking current customers from other business such as taxis. This could lead to increased regulations, which could stifle the progression of this business. Either way, it is likely changes will occur to make it more difficult for Uber to increase their bottom dollar as time progresses. The industry is highly attractive right now. While a patent may currently protect this unique feature or limit entrants, it will only last for a limited amount of time. Once the entrance diminishes, many other eager participants will likely enter the marketplace to reduce prices. However, Uber will continue to be successful until new entrants are able to enter the marketplace or compete for consumers. References Tangel, Andrew and Austen Hufford. (2015). “Uber Logs Major Gains in New York City, Figures Show”. Wall Street Journal. http://www.wsj.com/articles/uber-logs-major-gains-in-new-york-city-figures-show-1445821132 Picker, Leslie and Mike Isaac. (2015). “Uber Said to Plan Another $1 Billion in Fund-Raising”. New York Times. http://www.nytimes.com/2015/10/24/business/dealbook/uber-said-to-plan-another-1-billion-in-fund-raising.html?_r=0 Froeb (2014). Managerial Economics: A Problem Solving Approach. Cengage Learning
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Uber is essentially Ebay on wheels. Drivers provide the service and hold most of the liability while Uber enjoys lesser overhead and greater profit margins. As other players join the industry or as drivers become more independent, Uber will then see a decline in profits and would have to work harder to retain member drivers and compete in price. Another factor benefitting Uber is the lack of investment in transportation infrastructure in the US and the growing reduction in public transportation services outside urban areas. If a new mass transit provider were to receive the rights to bus routes in suburban areas where gaps in service exist, they would take a huge chunk out of Uber’s profits.
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