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The Current and Future Business Models of Ride-Hailing Companies

Leading ride-hailing companies are continuously losing a great deal of money and do not project a profit any time soon. Still, investors expect that these companies someday will find a path to profitability [1].

The straightforward (yet extremely challenging) solution for cutting costs is to eventually make use of autonomous vehicles. When entering the public market earlier this year, Lyft stated that it hopes to use AVs for most of its rides within 10 years. But, until this is realized, there is a question if any extra money will come from higher prices paid by riders or from lower wages paid to drivers?

Economic theory predicts that sensitivity to price changes determines who will pay more, and studies show that passengers are not very sensitive to price, while drivers are. The most comprehensive study of rider behaviour in the marketplace [2] found that riders did not change their behaviour much when prices surged. It showed that for every 10 per cent increase in price, demand fell by only about 5 per cent.

Drivers, on the other hand, are quite sensitive to prices (e.g. their wages). Higher prices increase driver incomes, but only for a few weeks. As new drivers enter the market, attracted by higher wages, the average driver must spend more time waiting for fares. On average, they increase their hours by 20 per cent in response to a 10 per cent increase in wages. That is about four times larger than the response by passengers to changes in the price of a ride. In other words, because drivers are four times more price sensitive than riders, a reasonable guess is that 80 per cent of the price burden will fall on passengers and 20 per cent on drivers.

 

Personal comments

Uber and Lyft, the two leading ride-hailing/sharing companies in the U.S., are both trading on public markets with a combined worth of more than $80 billion. It is becoming more and more evident that they see themselves as mobility providers, and that they are preparing for a future with autonomous vehicles and robotaxis. The question is of course when such a future will arrive and if the companies are able to outlive the wait while continuing to expand and bleed money. Still, one might argue that it is overall positive that these private companies are using venture capital to try out a range of different modes and models for transportation, step by step challenging the accustomed state of utilizing private vehicles, traditional taxis or public transportation.

 

Written by Victor Malmsten Lundgren, RISE Viktoria.

 

Sources

1. 2019-05-31. Passengers May Pay a Lot More. Drivers Won’t Accept Much Less.

2. 2016-08-30. Using Big Data to Estimate Consumer Surplus: The Case of Uber.