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Ubers Business Model and Economic Concepts
Introduction
Transportation firm Uber Technologies was formed in San Francisco by Travis Kalanick and Garrett Camp in 2009. Its founders ascribed the idea to a previous incident in Paris when they could not get a taxi. Transportation, delivery, and courier services are areas where Uber has a strong availability. The organization has operations in more than 785 metropolitan regions across 80 countries and has a significant worldwide history. Lyft is the immediate competitor of uber, with a market share of 67% in the taxi sector in America. Because of its innovative business model, product and service diversity, unmatched convenience, and outstanding customer service, Uber has seen enormous growth. The paper examines Ubers business model, including its usage of surge pricing and price discrimination, the concept of economies of scale, international expansion potential, and asymmetric knowledge.
Gaps Exploited by Uber in Its Entry
The taxi industry was disrupted by Uber, which combined technology and the ride-sharing business to exploit the previously existed gaps. The companys arrival into the taxi industry was a game-changer. A ride-sharing model, rather than owning the fleet, was the key to Ubers success because it allowed them to attract many customers (Bick, 2019). The Uber platform has attracted many car owners who have transformed their vehicles into taxis to earn more money and save time. Ubers business model relies heavily on using a mobile phone application, which fills a need in the market that existed before Ubers launch (Garud et al., 2022). Riders were able to book cabs quickly and easily, considering the program. Individuals have dominated the taxi sector without a recognizable brand to which the general public could relate and trust (Pepi, 2018). Because of this, Uber was able to create a name for itself as a service that customers could trust and rely on.
The taxi industry is well-suited to geographic considerations because it is needed in every country at some point. The company identified a ride-sharing service that may be used at any location in Ubers many operational locations (Oppegaard, 2019). people can order a ride via their app, which is accessible to many people. At Ubers inception, the payment method was another untapped market opportunity (Pepi, 2018). The majority of taxi companies did not have an established method of receiving payment for their services. Uber tapped into this and created a convenient and safe cashless payment method. Additionally, their decision not to charge riders a set amount made many individuals choose their service (Garud et al., 2022). Instead of charging a flat charge, Uber relies on the desire of customers to pay, which may exclude certain would-be customers.
Taxi service providers have long held sway in the market because there was no established method for customers to vent their complaints and review the quality of the service they were receiving from drivers. Uber changed by providing a seamless experience for both drivers and passengers (Pepi, 2018). Both good and negative Rider comments can be submitted through the Uber app or directly to Uber customer service, dramatically increasing Uber user confidence in the service. Another gap in the taxi industry was discovered when the companys founders decided to start a ride-sharing service rather than owning the cars themselves (Bick, 2019). This business model protected Uber from the governments unwarranted costs and taxes. In addition, their business approach keeps the drivers from additional expenses, allowing them to provide relatively affordable fares, attracting riders.
Ubers Use of Surge Pricing Relative to Demand and Supply
Surge pricing is a pricing strategy in which a company modifies its prices in response to fluctuations in supply. If many people are using Uber, the company raises the price of its services accordingly. Ubers standard multiplier is used to determine the increase in the cost of a ride. Rush hour, seasonal change, and inclement weather are common triggers for this phenomenon (Pepi, 2018). The standard multiplier automatically raises the regular price when there is an increase in the number of passengers about the number of drivers. Ubers app displays a color change in the surge areas from light orange to dark red during a pricing increase. As a result of surge pricing in Uber operations, only one room at a time suffers the price fluctuations, while other rooms continue to charge their usual rates (Bick, 2019). Uber uses surge pricing to balance the demand for rides with the supply of drivers. In addition, it serves as a motivating factor for drivers to work in high-volume areas.
Ubers use of surge pricing demonstrates that the market is working under high demand, influenced by supply and demand forces. Demand and supply are stable in a typical market, which means that prices rise or fall due to these fluctuations (Oppegaard, 2019). A shortage of service providers is caused by high demand, particularly during rush hour. The rise in demand is met by an automatic increase in the price of Ubers services in high-demand locations. Uber riders are forced to pay more during peak hours or wait for the wave to subside. Price increases come from a temporary imbalance between supply and demand, but prices will return to normal once the supply and demand balance is restored (Bick, 2019). In Appendix A, the Uber market is depicted by the two curves.
Uber Surge Pricing Relative to Price Discrimination
Prices for the same product and service might vary depending on who the seller is and the type of buyer. Surge pricing by Uber is a kind of price discrimination, where clients are paid differently for shared services. Customers who use the same service in low demand pay substantially more than those who use it in areas where demand is high. For significant price discrimination, a fragmented and segregated market is required (Bick, 2019). Customers in a certain market sector have no other option but to pay more for the same service elsewhere.
The geographical isolation of markets experiencing surges and needs without a demand surge accounts for the effectiveness of Uber pricing discrimination. Ubers large market dominance makes it much easier for clients to use the service because they have no other option. As a result of their decreased prices, price discrimination is encouraged (Pepi, 2018). Another method Uber uses pricing discrimination is by charging customers upfront. Because there is no fixed fee, clients are accused based on their willingness to pay in this case. Customers from affluent areas are given an unfair advantage over those from lower socioeconomic backgrounds. Customers from thriving suburbs face higher prices than those from less affluent regions.
Economies of Scale and Scope in Uber Company
A companys benefit through expansion is known as economy of scale. Global expansion and a wide range of service offerings are evidence of this companys rapid growth (Garud et al., 2022). Management, technological, research, and scale economies are only some of Ubers recent advantages. Lenders may be more willing to lend to the company because of its huge capital base. Pepi (2018) confirms that Uber has approximately USD 82.4 billion market capitalization. Investment and lending institutions are drawn to the companys enormous value, which they perceive as safe and secure. To further enhance its operational efficiency, Uber employs top-notch management and organizational tactics (Oppegaard, 2019). Uber has always been ahead of the curve when it comes to adopting new technology because its app is its primary method of conducting business.
As demonstrated by Uber Technologies, the diversification and differentiation of multiple services aim to achieve economies of scope. A company may produce a related commodity to its primary product to reduce overall manufacturing costs. The cost of producing a single unit is decreased in economies of scale by mass-producing a range of goods (Garud et al., 2022). Since its beginning in 2009, Uber has expanded its services to include Uber Eats, Uber Angel, Uber Freight, and senior citizens service. As a result of Ubers service expansion and lower operating costs, the company has grown its revenue sources.
Ubers Application of the Game Theory
The drivers and the Uber service provider are the two main characters in the Uber business model, and they both contribute to its successful operation. They make their own decisions, but they are all bound together because they must generate revenue and keep their customers happy (Pepi, 2018). The activities and decisions of the two parties directly impact the money created by each party. A decision made by one person in a deal influences the decisions of the other participants, which is referred to as a game theory. It postulates that there is a profit to be gained due to the players decisions (Skok & Baker, 2018). Both participants benefit when one makes a good decision and vice versa. Players in-game theory behave not only for their benefit but also for the other players involved in the agreement.
The decisions and actions of Uber drivers and Uber platform managers directly impact each others bottom-line earnings. They must maintain complete trust in one another and operate in the best interests of both parties. Drivers must ensure that their passengers are supplied with a satisfactory service, picked up on time, and dropped off at the correct location (Pepi, 2018). Ubers administration is responsible for ensuring that the entire process runs smoothly by coordinating between passengers and drivers and reacting to complaints from passengers. Uber drivers and its managements incomes are intertwined since the activities and decisions directly affect them. Both players benefit from the Uber administrations efforts to improve the systems overall efficiency, which will lead to an increase in demand and an increase in their ratings (Bick, 2019). For their part, Uber drivers must make sure that their passengers and other goods are delivered and picked up on time because this affects their profits and those of Uber management.
Ubers International Expansion Potential and Trade Restrictions
The prospects and challenges that Uber may face in its current crisis have recently been the subject of discussion regarding the companys possible foreign expansion. By 2023, Uber will be operating in over 80 countries, but it can grow much further. Some nations, particularly those in the developing world, have yet to meet the same standards as wealthy countries regarding the cab sector (Skok & Baker, 2018). If Uber establishes its services in these nations, it can take advantage of this gap. Uber can also take advantage of the fact that many developing and third-world countries have a strong desire to attract international investment. These countries economies must improve, so Uber is an attractive investment. It can help alleviate unemployment while also stimulating economic growth. As a result, Uber can expand its market reach into the previously untouched territory.
However, current competition, diseconomies of scale, and unfriendly trade policies pose significant obstacles to Ubers global expansion. Several governments prioritize protecting local and newborn industries over international investments, which may directly or indirectly compete with current sectors. In nations where Uber operates, critics claim that Uber is unfairly competing with small and individual taxi service providers because of its reduced charges. Ubers business model has been attacked in numerous countries for treating its drivers as independent contractors rather than employees (Skok & Baker, 2018). They believe that Uber drivers should be considered workers with the same rights and privileges as the rest of its workforce. Ubers worldwide expansion has been obstructed by this issue, which is only one of many complaints.
Ubers Incentive Payment Model
Uber implemented an incentive scheme to encourage their drivers to complete more rides each week. A 3% service fee reduction incentive is granted to drivers who meet the weekly target of 15 trips. A third incentive Uber offers is to pay extra for completing a set number of trips in a specific location. In peak hours, Uber surge pricing allows drivers to make extra money (Bick, 2019). Incentives paid by Uber are designed to motivate drivers to go above and above their weekly targets, which will increase their earnings.
Uber is entitled to a larger share of the profits because it does not own a car but provides a ride-sharing platform. As a result, it has been found that Uber reaps significant benefits from drivers who use their vehicles (Pepi, 2018). Uber believes it has a right to the additional income because it is generated on its platform, despite this argument showing an issue between the agent and the principal. The greatest way to motivate drivers to do more for both the principal and the agent is to use incentives.
Ubers Business Model and Asymmetric Information Issues
When a user of Ubers application gives pertinent information, the company can link riders and drivers. This information is kept strictly private and will not be shared with anyone else. Uber does not charge a flat cost to all of its users and instead uses the information in the service delivery and price calculation processes. Ubers principal source of income is the service fee imposed on drivers utilizing the Uber platform, as opposed to asymmetric business models where revenue is made from platform users information (Bick, 2019). The Uber app uses the information provided by the user for the intended purpose, which is the clients efficiency and the improvement of service delivery.
Conclusion
Uber has attracted many car owners investing in the business since it started in 2009. Therefore, it is a global transport company whose success is attributed to its unique business model and product and service diversification. It is greatly considered because of its absolute convenience and its customer service.
References
Bick, G. (2019). Uber SA: Disruption of the local taxi industry? Emerald Emerging Markets Case Studies.
Garud, R., Kumaraswamy, A., Roberts, A., & Xu, L. (2022). Liminal movement by digital platformbased sharing economy ventures: The case of Uber Technologies. Strategic Management Journal, 43(3), 447-475.
Oppegaard, S. M., Ilsøe, A., Jesnes, K., Rolandsson, B., & Saloniemi, A. (2019). Uber in the Nordic countries: Challenges and adjustments. Nordic future of work Brief, 1.
Pepi, L. (2018). The sharing economy: Uber and its e? Ect on taxi companies. Acta Economica, 16(28), 123-136.
Skok, W., & Baker, S. (2018). Evaluating the impact of Uber on Londons taxi service: A strategic review. Knowledge and Process Management, 25(4), 232-246.
Appendix
The following curves show the Uber market working in (a) conditions when the market is standard and (b) when there is a price surge due to excessive demand.
P1 shows the price increase due to excessive demand with a constant supply. E.O E1
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