October 25, 2018 / 2:09 PM / 21 days ago

Breakingviews - Hadas: Six economic reasons to hate Uber

LONDON (Reuters Breakingviews) - Many economists love Uber. They look at the quasi-taxi company’s aggressive disruption of local monopolies as a case study in the power and wonder of free markets. They could hardly be more wrong.

A man holds a placard during a protest against Ola and Uber outside Uber's head office in Mumbai, India, October 22, 2018. REUTERS/Francis Mascarenhas

The theoretical appeal seems irresistible. Every one of the 40 distinguished economists who answered a 2014 survey from the University of Chicago’s Initiative on Global Markets agreed that consumer welfare was increased when “car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements”. They were far too kind. The business model of Uber, the undisputed global market leader in this business, contravenes the wisdom of no less than six different types of economists.

The enthusiastic generalists come first, because Uber does not compete on their desired equal footing. Indeed, in the four years since the poll was taken it has turned into a zombie company. Without optimistic investors pumping in cash it could not stay in business for long, not with losses amounting to 7.4 percent of total bookings in the second quarter of this year, ignoring the fiction that payments received but passed to drivers are not revenue.

Thanks to this financial advantage, Uber can take high market shares by luring customers with unsustainably low prices. Management claims the business is close to profitable in some cities. If so, it must be taking really big hits elsewhere. Since Uber is already an efficient operator in its ride-hailing business, the main route to solid profitability in its core business runs through higher prices for customers. The only way to give the company’s investors the huge returns they are anticipating is by engaging in anti-competitive behaviour. That is not the way free markets are supposed to work.

The second group of economists who should dislike Uber are specialists in labour markets. They know that the standard early industrial practice of pushing down wages as far as possible is bad, for the affected workers and for the whole economy. Uber, however, has not learned the lesson. Its drivers get a rough deal.

Not only are they deprived of the protection and benefits which come with the legal status of full or part-time employees, but they are responsible for providing the business’s largest capital asset – its cars. Many quit when they find out how much maintenance expense cuts down their earnings. Only 25 percent of them last for a full year, according to a 2017 internal study reported by The Information technology news service. Of course, fares would rise if Uber paid its workers fairly, and the path to profitability would be even steeper.

Transit economists are a third aggrieved group. They have learned that free markets do little to help arrange urban travel, because the full costs and benefits from the different modes of transport cannot be captured by prices. For example, it is politically impossible to charge drivers the full cost of providing good roads, while many of the gains from public transit are reaped by non-users.

What the transit pros see in Uber is a company that in most cities puts more cars on already crowded roads, because so many of its passengers would otherwise have walked or taken mass transit. Even compared to self-driving, Uber adds the road-time of picking up passengers. A 2018 study by Schaller Consulting showed that in the United States Uber and its competitors added 2.6 miles of car driving for every mile that passengers did not drive themselves.

Management experts are not always considered economists, but whatever they are called, they are the fourth group who should be Uber-angry. The company’s notion of strategy is just about the opposite of best practice, even leaving aside the antics of Travis Kalanick, the now expelled founder, and the continuing desire to increase unprofitable revenue. No theory can justify this money-losing company trying to make self-driving vehicles. Ventures such as scooter rental and catering are basically distractions for managers of the zombie core business. Food delivery is the only Uber diversification that takes some advantage from the corporate expertise.

Fifth on the list are regulatory economists. They can provide some comfort to Uber fans, as well as to many customers, since Kalanick really did attack many inefficient and unjust local arrangements. However, no app can guarantee fair prices, competent drivers and cars that are available when needed. Only good regulation can do that. And as London’s threat to suspend Uber’s licence demonstrated, good regulators will not look kindly on the relative newcomer’s aggressive approach, even if current boss Dara Khosrowshahi is cutting back somewhat on the bellicosity.

Finally, Uber should give financial economists a queasy feeling. They like to think that their beloved financial markets make good judgments of all available information. If their efficient market hypothesis were true, then bankers planning Uber’s initial public offering would not be suggesting the $120 billion valuation floated in some news reports. For a company with annualised sales of around $50 billion, large current losses, no clear path to sustainable profitability and serious questions about its future relations with regulators, something much closer to zero looks more in line with sound economics.

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