Uber and the four trade-offs of disruption

(featured image adapted from winnifredxoxo cc 2.0)

The effects of disruptive innovation are more multifarious than they may seem at first sight

On Wednesday evening 23 March, a few hours after the Westminster terrorist attack, a friend of mine wanted to take an Uber taxi home from central London. Normally, even during rush hour, there would have been an Uber within a few minutes from any location, but this time the wait was more than 20 minutes. What was going on? Four interesting trade-offs explain this unusual situation, each of them related to Uber’s disruptive business model.

Time vs money

One of Uber’s central features is its use of dynamic pricing – aka surge pricing. When demand from customers rises while the supply of drivers remains constant, the waiting time inevitably increases. This triggers Uber to increase its prices, which is an incentive for more drivers to come on stream. As capacity is brought in line with the demand the price stabilises and drops again.

Uberphone

Wondering what my time is worth (cc0)

This is standard economic theory, and generally works well. Economists love this approach, as it offers customers a choice between time and money. Price-sensitive users can wait, or use a slower means of transport, while those who value their time more can choose to take the financial hit.

Such price discrimination is sometimes regarded as unfair, not just with Uber, but elsewhere too, for example with fast-track tickets in theme parks. Yet all this does is recognize that whenever a good or service is scarce, the users pay a price – if not in money, then in time.

Efficiency vs reputation

So did the system fail to work on Wednesday evening? Not really: there was another trade-off at play. When, in December 2014, Man Haron Monis took several people hostage in the Lindt Chocolat Café in Sydney, Uber hiked its prices for rides in the area by up by a factor four. They received a barrage of criticism, in spite of their protestations they did so for people’s own good.

So instead of letting the law of supply and demand do its thing, Uber took the view, last Wednesday, that their reputation is more important. Sydney taught them a lesson they could have learned from a 1986 paper by Daniel Kahnemann, Jack Knetsch and Richard Thaler. In it they explore the trade-off between fairness and profit. An often quoted question from their research is this one: “A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as: Completely Fair, Acceptable, Unfair, Very Unfair”.  82% of the respondents thought the store’s actions as unfair or very unfair.

Work vs leisure

hammock

More money, or I stay in my hammock (picture: Paw Paw cc2.0)

The irony is that Uber was actually right in Sydney (and would have been right in London) that surge pricing would have helped more people get away more quickly. Another key characteristic of Uber’s model is that the drivers work when they like. Surge pricing is meant to alter the balance between the attraction of free time and the appeal of working and earning money (as well as, perhaps, putting oneself in danger) for drivers.

During normal rush times, the prospect of higher earnings entices more drivers to work in more unpleasant conditions – in exactly the same way that extra pay is needed to get employees to put in overtime. But that incentive was missing now, and clearly the sense of civic duty was not sufficient to increase the number of drivers to meet the increase in demand.

Control vs less responsibility

One of the controversies surrounding Uber is that of the status of its drivers. Are they employees or self-employed? This is the subject of an on-going legal dispute. The implications on things like holiday and sickness pay are very important for the drivers, and these are something which Uber clearly does not want to take responsibility for.

Yet, as so often there is a trade-off involved in choosing to decline that responsibility. A taxi firm whose drivers are employees can use the conventional powers of hierarchy to ensure they get on the road. The trade-off for reluctant drivers would be a tough one: comply with their employer’s demand or resign. But Uber’s conditions explicitly state drivers can set their own schedule, which means the company has traded away much of the control they would otherwise have over them.

 

There is much debate over whether Uberification is a good thing or not. Among both proponents and opponents you find a good deal of ideologically inspired argumentation, and such principled perspectives can sound appealing.

But these four new trade-offs, which did not really exist in the same way before, reveal the complexity that can result from disruptive innovation. Is time worth more than money? Does reputation outweigh efficiency? Is having more choice between work and leisure a good thing? Is it worth giving up control in return for less responsibility?

The Uber question is not an easy one to answer.

 

Advertisements

About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s