Upsetting Uber’s Economics

The New York City Council has just moved into Uber territory. Expressing concern with congestion and pay, their new legislation includes a car cap and a wage minimum for ride-hailing services.

Where are we going? To Uber’s supply side.

The New Rules

The first in the U.S., NYC has decided (once the Mayor signs the law) on a slew of regulations for “high-volume for-hire services.” (10,000 or more trips a day)

One goal is to even the playing field for the city’s taxis. Since Uber and Lyft arrived, the price of taxi medallions (the right to drive a taxi in the city) has plummeted. Meanwhile cab drivers have less business as more of us use Uber instead. The city council solution is a 12-month cap on licenses for new ride-hailing vehicles.

A second concern is the wage taken home by ride-hailing service drivers. One study indicated that close to half of those who responded to a survey took home less than $57,000 a year and 22%, below $30,000. (The accuracy of the results and other wage research from MIT has been questioned by Uber.) While the wage issue has not yet been decided, one proposal is a $17.22 per hour weekly minimum.

The Uber Model

Assume for a moment that the weather is bad and the driving is dismal or perhaps few drivers want to do pick-ups in a certain neighborhood. This is when and where an Uber driver will go to his or her app. Knowing that demand has increased, the driver is attracted by a higher fare.

A similar phenomenon works its magic on drivers at less desirable times and in unpopular places. But you need to have the potential driver volume to make that “surge” work.

Below, you can see the surge prices that attract drivers:

So, when more people want a ride, Uber drivers have the dollar incentive to provide one. But you have to have enough drivers. And that is where the new law could create a problem.

Our Bottom Line: Supply Elasticity

Supply elasticity makes the surge work. When price is low, there are fewer drivers. However, when demand increases, like a rubber band, the number of drivers stretches.

As economists, we can see it all through a traditional demand and supply graph. Let’s say that it starts to snow. We have a shift in demand for ride-hailing services that takes the demand curve higher on the supply curve. The result is an increase in quantity supplied:

Translated into real life Uber, that movement in demand up the supply curve means more drivers.

BUT…

Having a cap on new vehicle licenses could diminish supply side elasticity. The result is fewer available rides, even during a surge. By drawing the more vertical less elastic supply curve that could result from the cap, I tried to display what would happen. You can see that even though demand pops, the quantity supplied is inadequate:

The Uber business model requires supply elasticity. A new vehicle cap might prevent those economics from kicking in.

My sources and more: The NYC Uber/Lyft story was in the NY Times which also had the details on the wage proposals. But I suggest taking a look at the wage studies from MIT and the Independent Drivers Guild where you can assess their academic rigor. Meanwhile, looking through an economist’s lens you can see more about Uber’s elasticities and consumer surplus. And finally, this NY Times article returns us to what we have always cared about most. It talks about the tradeoffs we need to consider when figuring out taxi and ride-hailing service policy.