Drivers adopt a game theory approach to increase pay
A recent article by WJLA shows how Uber and Lyft drivers at Reagan National Airport have devised a plan to improve their pay. At specific times, both Uber and Lyft drivers meet in a parking lot to co-ordinate a combined log out of the rideshare app, tricking it into thinking that there is a shortage of drivers. This apparent shortage of available drivers results in the app increasing the prices for the fare in to order to attract more drivers. Once the fare is high enough, the drivers log back in to the app and immediately take advantage of the higher fare.
From a game theoretical viewpoint, this collusive behaviour works well as the incentives to participate are greater than the pay-off of acting alone. One single driver logging off and on will not influence the price surge. However, with enough drivers participating, the group has a critical mass that influences the supply of drivers and initiates the price surge. The drivers' opportunity cost of not participating is relatively small as they only lose a few minutes of their time.
Who are the winners and losers in this scenario?
The ones bearing the cost of this behaviour are the customers who are paying for the higher fares. Their alternative is to take a taxi or other transport and, as long as Uber and Lyft are more convenient and cheaper, they have no incentive to deviate from taking an Uber or Lyft and paying the higher fare.
For illustrative purposes, let’s assume that the average customer will take a $20 ride from the airport at normal prices. If the drivers log out of the app to force a price surge, the ride can cost up to $32. Let’s also assume that the only alternative is to take a taxi, which costs around $35. With Uber taking about 25% of the fare, a driver will make $15 with normal prices and $24 during the price surge. While waiting for the price surge, the driver misses out on about $2, reducing overall earnings to $22, which is still $7 higher than a normal price fare.
Through backward induction we can see that if drivers collude, consumers will take an Uber given $32 is still cheaper than $35 for the taxi. If drivers act alone, consumers will also choose Uber since $20 is better than $35.
Drivers now need to decide whether to act alone and receive $15 (the normal price minus Uber’s share), or to collude and receive $22 under surge (the higher price, minus Uber’s share and the cost of waiting). The earning under collusion is higher and therefore drivers collude and customers are forced to pay the higher fare.