Market power: Trading one oligopoly for another?
Another element missing from the debate is that ride-hailing tends to be dominated by one or two firms in a given market (even though the charge of “oligopoly” is usually reserved for the taxi industry). That’s as expected and intended. As one Uber analyst and critic
put it, the company’s “modus operandi is to subsidize fares and flood streets with its cars to achieve a transportation monopoly.”
The business models of big ride-hailing companies are
premised on establishing and profiting from a dominant market position. This is why venture capitalists have been willing to pour billions into Uber even while it has continued to
operate at a loss.
And it’s not just ride-hailing companies. We’re living in an era of huge winner-take-all digital platforms such as Facebook, Google, Amazon and others. These companies claim that users are only “one click away” from an alternative, but in reality, these dominant firms benefit from a
powerful set of advantages, including what economists call “network effects.”
Network effects are features of certain markets wherein, the more users that participate in a given service, the greater the value of that service. This gives incumbent firms a major leg up and creates a
tendency towards one or two companies dominating the market.
Uber and Lyft passengers usually find it unattractive switch to alternative upstarts—if they are even aware of them—because almost all the drivers are on the one or two established apps in their market. In turn, drivers have little incentive to switch to smaller apps because almost all the customers are using Uber or Lyft. It’s a self-reinforcing dynamic, like the one that helps keep Facebook dominant among social networks.2
Ride-hailing markets have shaped up in practice much as theory would suggest: highly concentrated. Uber and Lyft hold almost the entire
market share for ride-hailing in the US.3
What’s missing from the Uber debate? Market power, congestion, pollution, and even deaths
