Uber and the Market Price

I have an article today up at the Foundation for Economic Education that looks at the UK’s employment tribunal ruling that Uber drivers are employees of the platform company. The article attempts to explain why the tribunal fundamentally misunderstood platform technology, but there’s one issue I need a little bit more space to deal with. It’s the question of whether Uber’s supposed control of the price charged by drivers takes out of the driver’s hands the opportunity for profit and loss.

The employment tribunal clearly thought it did. As one of its particular reasons for finding that Uber was a transportation business rather than a platform it cited:

The fact that UBV [the relevant business entity] fixes the fare and the driver cannot agree a higher sum with the passenger. (The supposed freedom to agree a lower fare is obviously nugatory).

Part of the point of being in business is trying to find the correct price point at which to offer one’s services. Too high, and you won’t get the business, too low and it’s not worth your while or you’re leaving money on the table. Now, if you are in a market where there are countless others selling the same goods or service, such as a driver using a private vehicle, the market will set the price (the market-clearing price, where supply and demand meet), and you can determine whether or not to offer your services based on that price.

Until the advent of platforms, private drivers could not know this price. The transaction costs were too high. Uber provides this vital information to drivers through its algorithm. That’s why surge prices are so important – they tempt drivers on to the road who would otherwise be unwilling to offer the service.

As profits are maximized when marginal cost equals marginal revenue, what Uber has essentially done is ensured that drivers will earn the maximum profit they can based on their own individual circumstances. A driver with the freedom to try to charge a higher price based on his own hunches would be giving up business to other drivers with much more perfect information – the information provided by the Uber platform.

Once again, this service by Uber to drivers who use it is a feature, not a bug, for the driver’s business.