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Increased Competition

Question:

Discuss about the Booming Ridesharing Industry Ecosystem.

Ridesharing is relatively new to the point-to –point transport market in Australia. One of the key players in the ridesharing industry is Uber which from a humble beginning in 2012 has witnessed significant growth. Additionally, with the booming ridesharing industry, the taxi market has undergone significant changes in terms of customer bookings and other aspects related to pricing. Also, with the introduction of Uber and its growing popularity, there has been an increase in the regulatory framework of the ridesharing industry. Uber since its inception has brought about significant changes to the taxi and ridesharing ecosystem. The objective of the given paper is to highlight the key economic effects that introduction of Uber has led to in Australia with the aid of basic economic theories.

With the introduction of Uber, there has been a clear increase in the competition. This is not hard to understand considering that Uber operates in the point to point transport market where there are traditional players in the form of existing taxis. Due to Uber’s introduction, the supply of taxis has gone up without a proportional increase in demand and hence competition has worsened. This can be captured with the aid of the following demand –supply diagram (Arnold, 2016).

As represented above, owing to introduction of Uber in Australia, the supply of taxi services has increased resulting in shift of the original curve from S to S1. Since the demand does not alter immediately, hence the impact is in the form of increased quantity of rides along with reduced prices being offered to the consumers (Mankiw, 2014).

An alternative reason for the increased competition besides lower price is that ridesharing offers certain benefits to both producers and consumers which are not in place in the traditional taxi system. One of these is the ease with which the consumer is able to find a ride at the right place at the right time. The increased competition needs to be viewed along with decreasing prices which is in line with economic principles considering that higher competition leads to availability of more options and hence improves the bargaining position of the consumers. Also, the price charged to the consumer by Uber is about 20% lower in comparison to the traditional taxi which thereby offers people with a cheaper alternative (Deloitte, 2016).

In a bid to ensure that the scarce resources are utilised in the most efficient manner, it is imperative to consider the allocative & productive efficiency associated with a given industry. These efficiencies are essentially based on the consumer and producer surplus that a given industry structure tends to produce. In this context, it is noteworthy that higher competition typically has a positive impact on efficiency as it tends to reduce the deadweight loss and tends to maximise the cumulative sum of consumer and producer surplus. A case in point is a perfectly competitive market which tends to have zero deadweight loss (Nicholson and Snyder, 2011).

Owing to the lower transaction costs, ridesharing players such as Uber are able to offer their services at a lower cost compared to the taxi industry. As a result, they are able to attract those passengers which would have otherwise opted for an alternative means of communication and thus they have been able to expand the point-to-point transport market size. An analysis by Deloitte indicates that about 60% of the riders opting for Uber comprise of those customers who were earlier not availing point-to-point transport. The consumer benefit of Uber is not limited only to lower price but also a superior quality which also attracts consumers. These quality benefits are outlined as indicated below (Deloitte, 2016).

With the above benefits in mind, it is quite possible that ridesharing platforms such as Uber can potentially lead to creation of consumer surplus. This is created when the consumers are willing to pay a higher price than the current price in wake of the perceived benefits from ridesharing.  Taxi services in general also tend to have a high consumer surplus owing to the lack of alternatives (Arnold, 2016). Uber in Australia tends to generate consumer surplus on two counts namely lower fares and better services. According to a Deloitte report, the estimated annual consumer surplus created by lower fares amounted to $ 31.5 million in 2015. The same report estimated the annual consumer surplus on account of differentiated services at $49.6 million in 2015 (Deloitte, 2016). It is quite likely that currently this amount would be significantly higher considering that the popularity and number of daily rides has increased. Hence, based on the above discussion, it is apparent from the allocative efficiency viewpoint, the introduction of Uber has been positive as it has contributed to enhancing consumer surplus and expanded the overall market. As a result, the increase in consumer surplus is not limited to declining consumer surplus of the traditional taxi industry (Mankiw, 2014).

The traditional taxi market was highly regulated and in many regions in Australia, only a fixed number of licenses were available leading to high costs related to licensing and administration. Additionally, the bailment fees are quite high which also adds to the woes of the taxi driver. This led to low real wages for the taxi drivers in the traditional setup. However, the introduction of Uber has altered this significantly. Uber platform has attracted additional workers owing to a lesser 20% fee for using the Uber platform coupled with flexible hours. Ever since Uber emerged on the scenes, there has been an upwards shift in the labour supply to the point-to-point industry market owing to incremental interest generated by the company. As a result, the company is extending valuable social benefit in the form of tackling unemployment at a time when the mining industry is suffering (Deloitte, 2016).

Benefits to Producers

The flexibility benefit offered to taxi drivers is substantial. The average driver’s weekly hours of work on UberX platform is about 19 hours as compared to 45 hours for traditional taxi drivers. This indicates the Uber helps in fighting underemployment by providing a lucrative second option to individuals besides their primary employment. Also, there is the tendency for these drivers to be available at those times when the demand is high and hence earnings can be maximised. Further, the drivers can also use the surge pricing prevalent at such times which further enhances their earnings. Hence, the earnings per hour of drivers on UberX platform is significantly higher than the taxi drivers (Deloitte, 2016).

The impact of Uber is not limited only those who are using UberX platform but it has had positive effects even for the taxi industry. One of the most significant impact is in the form of lower license costs which is evident in the following figure (Deloitte, 2016).

It is apparent that there has been a decline in the price of a taxi license ever since Uber started offering services in 2012. Besides, the producers have also been benefitted on account of various technological innovations such as goCatch, Ingogo which also provide additional options for the drivers. It is apparent that introduction of Uber in Australia has led to enhanced producer benefits in the form of flexible hours, higher wages and lower licensing costs (Deloitte, 2016).

Despite the above benefits to producers and consumers, there are been calls from certain sections to regulate the taxi sharing industry owing to the safety and security concerns. Some authors cite that customer rating presents a very light form of scrutiny and hence there could be potential safety risks to the customers (Jericho, 2016). Also, it is cited that since for many drivers on UberX platform, this is not a full time job, hence the stakes are comparatively lower. Further, the upfront costs for a driver to offer services on UberX platform is quite minimal which according to some lowers commitment to customers (Dimitriadis, 2016). However, most of these concerns are unfounded and raised by the sympathizers of taxi industry.  Going forward, even if such concerns do arise, specific mechanisms can be put in place to address the same (Deloitte, 2016). Therefore, it would be appropriate to conclude that the criticism of Uber and similar players offering peer to peer services is largely unfounded especially considering the benefits to both producers and consumers.

Conclusion

On the basis of the above discussion, it may be appropriate to conclude that introduction of Uber in Australia has raised the competition level and led to reduction in prices. This reduction in prices has generated significant savings for the Australian consumers. Also, the differentiated services offered by Uber have implied that the point to point transport market size has expanded as the preferences of customers have skewed towards taxi. Significant consumer surplus has been generated as a result. The producers have also benefits owing to flexible working hours, reducing underemployment, unemployment coupled with higher wages. Also, the license costs have declined which is beneficial for the taxi industry. Owing to the unpatrolled success, the sharing economy participants such as Uber have faced criticism but it is mostly unfounded.

References

Arnold, A.R. (2016) Microeconomics, 9th ed. Sydney: Cengage Learning.

Deloitte (2016) Economic Effects of Ridesharing in Australia, [online] Available at https://www2.deloitte.com/content/dam/Deloitte/au/Documents/Economics/deloitte-au-economics-economic-effects-of-ridesharing-australia-150216.pdf [Accessed March 25, 2018]

Dimitriadis, K. (2016) You may love Uber, but why are we ignoring the government’s treatment of taxis?, [online] Available at https://www.dailytelegraph.com.au/rendezview/you-may-love-uber-but-why-are-we-ignoring-the-governments-treatment-of-taxis/news-story/2f103905e9af15be2af8a6c5f4133fa3 [Accessed March 25, 2018]

Jericho, G. (2016) The dark side of Uber: why the sharing economy needs tougher rules, [online] Available at https://www.theguardian.com/business/grogonomics/2016/apr/18/uber-airbnb-sharing-economy-tougher-rules-australia [Accessed March 25, 2018]

Mankiw, G. (2014) Microeconomics, 6th ed. London: Worth Publishers.

Nicholson, W. and Snyder, C. (2011) Fundamentals of Microeconomics, 11th ed. New York: Cengage Learning.

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