Uber – A Test of the Free Market

uber photo
Photo by bfishadow
You’ve probably heard about Uber, I’ve written about it before, and they are all over the news. Uber has a service called UberX that allows normal people to take their cars and get paid for giving rides to people. Basically it’s a taxi service minus all the government regulation.

Uber, not surprisingly, makes wildly optimistic claims about what people make. One journalist decided to go undercover as an Uber driver and tell about her experience. Based on her activities we learn that you can net about $10/hour as a driver for Uber, and some people claim to make a little more.

There are several very interesting things about Uber and it’s competitors.

They Have Successfully Bypassed Government Taxi Regulation

UberX is available in most major cities. Even eastern stalwarts of unions and labor movements like Philadelphia, Pittsburgh and others have allowed Uber to come in to their communities. Medallion systems in these communities require taxi services to operate under strict guidelines and limit the number of taxis in the city. Uber doesn’t require commercial insurance. UberX has an insurance policy which (in theory) works with the driver’s personal insurance. Uber leaves the maintenance of the cars up to the individual that owns them unlike a traditional taxi company that would purchase and maintain their fleet. Many cities with this medallion system are still allowing Uber to operate and not follow all their rules.

Uber is Paying it’s Drivers Less than Taxi Companies

Salary.com lists the average taxi driver salary at $32k per year. That’s $16/hour. While it seems like Uber driver’s hourly income may be below that, the real issue is the cost to the company. These aren’t full time employee’s so Uber isn’t paying unemployment tax, payroll taxes, related insurance costs, benefits, etc… Uber has, so far, succeeded in eliminating all these extra labor costs that regular companies have to deal with.

Uber Has Variable Fees

Uber has adjusted it’s fee schedule in many cities and has something referred to as “Surge Pricing” to increase costs at busy times of the day. The effectiveness of this dynamic pricing algorithm may be under scrutiny, but ultimately it’s the right direction to go.

What does this mean?

Uber has knocked down one of the most highly regulated industries in the country. Will their model be successful? Eventually the transportation sector, if it’s not interfered with by government regulators, should reach an equilibrium. Competitors in the market will limit the amount of profit Uber can take off the top and prices should adjust to the point where there are an optimum number of drivers available to satisfy the market. Hopefully, with the power of the Internet, we will see a perfect free market form.

Right now Uber is taking a 20% charge, plus $1 in insurance from every trip, a fee that seems quite successful. Can Lyft or other competitors apply enough pressure to minimize that profit taking? It will be interesting to see how this whole system evolves and changes our transportation infrastructure.