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Drivers take action, Uber does not!

Fun & everyday life Business

Uber and Lyft, famous for their innovative peer-to-peer ridesharing service and their disruption of the taxi industry, have often been criticised for the low pay of their drivers. Drivers have gone on strike in New York, San Francisco and London to demand better pay and increased job security. These strikes have seen small scale victories for the drivers, such as achieving a guaranteed minimum wage pay in New York, yet protests continue as drivers look for new ways to improve their situation.

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.

As long as drivers keep the surge price low enough to keep customers from choosing an alternative, the game results in the situation illustrated above. This is also called a Subgame Perfect Nash Equilibrium.

Why haven't Uber and Lyft taken action?

The outcome looks stable as no party involved (the driver or the customer) has an incentive to deviate. However, there is a third party involved in this game – the rideshare provider.

Uber and Lyft can influence payouts and in turn the outcome of the game, through strategic action. Yet, despite their ability to change the rules of the game, there has been little action from their side. But why?

Using a game theoretical approach to look at the different outcomes of the game and their payouts could give the answer.

Uber and Lyft could quickly and easily “solve” this situation, by changing the algorithm of the price surge and increasing the time it takes to raise the price. This would mean that drivers would have to wait longer for the price surge, and face increased opportunity costs which could lead enough drivers to deviate from the collusive behaviour.

And what happens to Uber and Lyft’s earnings?

Uber and Lyft earn a certain percentage of the drivers’ earnings. If drivers don’t collude, Uber earns 25% of $20, which is equal to $5 per ride. If drivers collude, Uber earns 25% of $32, which is equal to $8 per ride. Therefore, it doesn’t benefit Uber or Lyft to intervene. As long as there are no other externalities, e.g. customers boycotting Uber and Lyft or bad publicity, there is absolutely no incentive for Uber or Lyft to take action.

Rideshare drivers want better pay and when their demands are not fulfilled, they take action. By tricking Uber’s and Lyft’s app, it earns them more money. However, an unintended consequence is that Uber and Lyft gain as well. Since Uber and Lyft are profiting, their answers are vague and they give non-committed statements about taking action against this behaviour.

Real change will only happen when there is enough public pressure on Uber and Lyft to change the rules of the game. Until then, the only loser in this game is the customer who has to bear the additional cost.