Uber Case Analysis

Uber Case Analysis

Uber is the company that changed how people hail taxis. The company is one of the most revolutionary in the last decade. They determined how to use technology to make the taxi-hailing process more convenient for customers. They also helped drivers to have access to more customers without having to stay in places that would be the conventional stops for taxis. Apart from changing the taxi industry, Uber has also been a great example of the peer-to-peer business model. The company has revealed new ways in which businesses and individuals who can offer a particular service can make money with the help of a mobile application. The purpose of this paper is to analyze the case of Uber. The company exploited inefficiencies in the transportation industry to develop a business, the pricing strategies that it uses, and the application of certain economic models in the context of this company.

Analyze the market before Uber’s entry. Describe the inefficiency Uber exploited.

Uber is said to have revolutionized the taxi industry. Such an extreme claim is warranted, given how different the industry was before this company started its business. In most cities around the world, the taxi industry is highly regulated. Most of them barely used any technology that would enhance business performance (Schneider, 2017). One of the key characteristics was licensing requirements for taxi drivers. One could not just decide to offer public service transport without authorization from the government. Additionally, taxis were owned by small businesses. Like an airline company, such businesses would create a line of cars and hire drivers to offer services to their clients. Market entry for individual taxi drivers would be very hard because the taxi companies have most of the control in the market (Schneider, 2017). Third, taxi-hailing was much less convenient than it is now. One would typically have to go to the designated areas for taxis to get a ride. Uber came into the industry and changed all these factors.

Uber created a peer-to-peer business model. This means that any person with a car can use their application to be connected to people looking for transportation services. This kind of business model disrupted the regulatory requirements that previously controlled the travel industry. One would be able to operate a taxi business without necessarily seeking the same government licenses and other authorizations that a typical taxi business would need (Schneider, 2017). Additionally, taxis could now be owned by individuals. A taxi driver with Uber does not need to be affiliated with any taxi company to drive. Lastly, Uber created a convenient way to hail taxis. One can call a taxi from the comfort of their home or whatever location they are, and the driver will come to them. People no longer have to walk all the way to the taxi bay to get a ride.

Basically, Uber disrupted the taxi business by filling a gap that other companies in the industry had not filled. The company created convenience, something that was missing in the industry (Schneider, 2017). A taxi was almost no different from other forms of public transport as one had to go to a particular area to get a ride. However, with Uber, people can easily just call a taxi to their location and conveniently get a ride.

Explain Uber’s surge pricing in the context of shifts in supply and demand.

Uber’s surge pricing is a costing model that is driven by an algorithm. The algorithm increases the pricing of the Uber application depending on the rates of ride requests. The more people request rides in a specific location, the higher the prices will be in that area. Similarly, the prices are reduced when there are fewer requests (Jiao, 2018). The concept of demand and supply drives this algorithm.

Demand and supply are closely related to price. Demand and price have a directly proportional relationship. The higher the demand for a product, the higher its prices (Wetzstein, 2013). On the other hand, supply and price have an inversely proportional relationship. When there is an increase in supply, the prices will go down (Wetzstein, 2013). This is the same concept that Uber has applied in its surge pricing technique. When there is an increase in demand, the prices of rides on the app increase. The application detects an increase in demand by analyzing the increase in requests by people in the same area. When the supply of rides is high, the prices go down. An oversupply of services means that the prices will go lower to convince more people to use the ride’s services. The application uses its algorithm to measure changes in demand and supply to influence the increase and decrease of prices.

Evaluate Uber’s surge pricing in the context of price discrimination.

Uber’s surge pricing strategy can also be explained from the perspective of price discrimination. The prices change from high to low and vice versa with changes in demand and supply to control the number of customers who can use the services at a particular time. Price discrimination is a microeconomic pricing strategy that businesses use to achieve different goals in their target market groups (Elegido, 2011). This pricing strategy involves charging different prices for the same products or services to get customers to do something that the business expects they will do at a different pricing point. Uber’s surge pricing discriminates the buyers based on their purchasing power and the urgency of taxi services.

When there is a high demand for taxi services, the company chooses to keep the prices higher so that many people will choose not to use the application. The higher the Uber prices are, the more people will be likely to forego the services. Therefore, when the prices are high, the available drivers can more easily handle the demand for the products. When there are fewer requests and more drivers in an area, the Uber team uses the price discrimination strategy to encourage purchases. They charge much less for the same services so that people can use the services because of their affordability. For example, a person who may have used a bus may see the cheap prices on Uber and decide to travel by taxi instead. Therefore, Uber’s surge pricing strategy is a way of discriminating against consumers to control their purchasing decisions.

Apply the concepts of economies of scale and economies of scope to Uber’s business model.

Economies of scale are a cost advantage the businesses experience as they increase their level of output. When firms increase the scale of their operations, the cost of producing a single unit of their product also reduces, hence creating greater returns for the business as it increases the scale of the operations. Uber is believed to deliver economies of scale to its drivers. Drivers who use the Uber-hailing application have a greater chance of attracting more customers than those who part somewhere and wait for a customer. The Uber application increases the scale of their operations by connecting them to a larger pool of customers. As they get more customers, the cost of running the taxi per customer decreases. Therefore, the businesses are believed to gain more when they partner with Uber than when they operate their business individually.

On the other hand, economies of scope are gains connected to the production of more than one distinct product. A business will typically get more gains if it produces two products together rather than each separately. With this strategy, the unit cost of each product decreases as the number of products increases. Uber’s business model has tried to benefit from the economies of scope concept by diversifying the products on its platform. Within the transport industry, Uber has diversified its product offers to target different customer groups. For instance, there is Uber X for larger cars, Uber for choppers, and Uber for luxury cars. Additionally, the company has used the peer-to-peer model for other products. There is Uber Eats that connects customers to restaurants to get food delivered. The company also has Uber parcels in some countries, which includes courier and messenger services. The diversification of products distributes the costs between the different products, hence minimizing the unit cost of the product of the company.

Apply the concepts of game theory to Uber’s market.

Game theory is a concept borrowed from mathematical models of evaluating strategic interactions among rational decision-makers. From the business perspective, game theory is applied as a framework for conceiving social situations among competing players in a strategic setting (Barron, 2013). Game theory examines how players in the strategic setting will interact given a set of decision options and outcomes. Businesses use game theory to examine the consequences of the decisions that they make or those that competitors make in the strategic environment. Uber uses the concepts of game theory to make strategic decisions in its interaction with different players in its market.

For example, Uber is in a constant “game” where it creates pricing strategies that keep consumers wanting to ride with Uber and drivers staying with them rather than switching to other taxi-hailing companies. Since Uber started its business, there have been other businesses mimicking its business model. These businesses can easily take the Uber drivers, hence killing the business. However, Uber has been making its businesses strategically depending on what decisions competitors might make and the outcomes of these decisions. The company’s pricing strategy and policy towards its taxi owners are what keeps them in the company. Uber makes sure to have deals that are better than competitors to keep the drivers working with their applications. The company also uses game theory to keep customers. Through its attractive pricing policies, the company keeps customers wanting to use them over competitors.

Assess Uber’s potential for international expansion and potential trade policy issues.

Uber has great potential for international expansion. One of the main considerations that businesses need to make is the availability of the opportunity for their product or services in the international market. A business that needs to expand globally must consider whether there is a gap that they could fill in the international markets (Pent, 2016). Uber has a service that would fit into most cities. A lot of cities have public transport but not the kid that one calls to their location. The convenience that Uber offers will likely fit into a lot of global markets.

Another key consideration that businesses make in their international expansion plans is the resources used in the expansion process. For some businesses, expansion is harder because they have to think about the establishment of physical production plants and other supply chain management issues (Bryson et al., 2013). Uber, on the other hand, has a unique business model. The business does not need a lot of starting resources connected to supply chain management. The business only needs to meet the regulatory requirements in the new markets and begin its operations. The nature of this business, therefore, makes it easier for them to expand globally.

However, Uber might potentially face some trade policy issues in each of the markets in which it operates. Trade policies are laws and regulations that influence domestic and international business operations. These policies determine decisions such as tax payments, licenses, permits, and rules of trade in particular markets. As Uber is expanding to different international markets, it will encounter different trade policies. Therefore, the business will need to adjust its operations depending on the market into which it ventures.

Explain the incentive pay model Uber uses and how it affects the principal-agent problem.

An incentive pay model is a productivity-based model. This model pays workers based on their productivity rather than a standard wage (Bryson et al., 2013). Uber uses this model to pay its drivers. The drivers get the money from the rides but pay Uber a commission for using their application to get the rides. This model affects the principle-agent problem.

The principle-agent problem represents the conflict that a party may have with its representative agent. The agent is supposed to act in ways that are in the best interest of the principle. However, this responsibility gives them the power to affect the principle through their decision-making. In the Uber case, the company is the principal, but it is the drivers that represent them in the market; hence, they are the agents. Uber’s earnings are dependent on the decisions that the drivers make. Since the drivers are paid on an incentive-based model, they can easily affect Uber’s earnings by deciding not to drive. For example, if the drivers were to protest Uber policies by not working, the company could be crippled.

Discuss any asymmetric information issues with Uber’s business model.

Asymmetric information is a situation where there is imperfect knowledge. One party in the business relationship may have different information from others, causing an incomplete understanding of the market (Morellec & Schürhoff, 2011). Uber’s business model causes asymmetric information issues on the part of the drivers. Uber has a model where the drivers accept passengers blindly. Before they start a trip, they cannot know who the customer is, the customer’s destination, or the amount of fare that the application has estimated. This information is hidden to prevent the drivers from being picky with the customers. Information blondness also occurs between the drivers and the company. It is the drivers that get to interact with the customers. Some of these interactions are unknown by the company outside of the data they have on the application. Thus, they may be unable to know the customers’ characteristics for product development purposes.

References

Barron, E. N. (2013). Game theory: an introduction (Vol. 2). John Wiley & Sons.

Bryson, A., Freeman, R., Lucifora, C., Pellizzari, M., & Perotin, V. (2013). Paying for performance: incentive pay schemes and employees’ financial participation. Executive remuneration and employee performance-related pay: A transatlantic perspective, 123-278.

Elegido, J. M. (2011). The ethics of price discrimination. Business Ethics Quarterly, 21(4), 633-660.

Jiao, J. (2018). Investigating Uber price surges during a special event in Austin, TX. Research in Transportation Business & Management, 29, 101-107.

Morellec, E., & Schürhoff, N. (2011). Corporate investment and financing under asymmetric information. Journal of Financial Economics, 99(2), 262-288.

Peng, M. W. (2016). Global business. Cengage learning.

Schneider, H. (2017). Creative destruction and the sharing economy: Uber as disruptive innovation. Edward Elgar Publishing.

Wetzstein, M. E. (2013). Microeconomic theory: Concepts and connections. Routledge.

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A Case Analysis of Uber

Uber is a ride-sharing service started in 2009. If you are not familiar with Uber, you can learn more about the services it provides at Uber.com.

Uber Case Analysis

Construct an eight-page analysis of Uber using the following criteria.

1. Analyze the market before Uber’s entry. Describe the inefficiency Uber exploited.
2. Explain Uber’s surge pricing in the context of shifts in supply and demand.
3. Evaluate Uber’s surge pricing in the context of price discrimination.
4. Apply the concepts of economies of scale and economies of scope to Uber’s business model.
5. Apply the concepts of game theory to Uber’s market.
6. Assess Uber’s potential for international expansion and potential trade policy issues.
7. Explain the incentive pay model Uber uses and how it affects the principal-agent problem.
8. Discuss any asymmetric information issues with Uber’s business model.

Your essay must be at least eight pages in length (not counting the title and references pages) and include at least five peer-reviewed resources. Adhere to APA Style when writing your analysis, including citations and references for sources used. Be sure to include an introduction. Please note that no abstract is needed.