How Uber Increases Driver Profits While Being Cheaper Than Traditional Taxis

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If both the workers and the customers are getting a better deal from Uber, then who is it that's losing out? As Uber rolls out across the nation, consumers are getting a better deal and so are the drivers. Turns out it's those investors who hold the artificially scarce taxi medallions that seem to be getting hit.

You probably wouldn't expect falling costs to consumers and rising wages to employees when a new competitor comes into the market. That's not the way we normally think of markets working. But the rise of the various ride-share companies like Uber and Lyft does seem to be managing this. The reason is the basic structure of the taxi market in the big cities. Here's a little story from San Francisco, from Fortune:

Jason Bow worked as a cab driver for two years before he turned to Uber X. Compelled by promises of lower cost overhead, he began picking up passengers last July in his black 2010 Toyota Prius. For a 50-hour workweek driving a taxi, he once pocketed up to $1,250 after expenses. But as an Uber X driver, he makes more for less: a 40-hour workweek nets him about $1,500.

The passengers are also getting a better deal: even if Uber X isn't cheaper (which it mostly actually is), customers obviously think the convenience is worth it. Otherwise, they wouldn't use the service. But if the driver's making more money and the consumers are paying less then where's that money coming from?

One answer is that using an app to hail a cab is inherently more efficient than standing in the gutter and hoping an empty one will sail by. So there's more paid usage of the vehicle and the driver's time, meaning that these overheads can be distributed across more paying passengers. But there are apps to hail regular cabs these days, too, so there must be more.

Limiting the fleet

The other part of it is that most cities artificially limit the number of cabs that can be on the roads in any one year. This is done by issuing a badge or medallion.  Because of the artificial limitation, those medallions obviously have value --in New York City, as much as $1 million for the right to have a single cab on the road 24/7. If you want to drive a cab, then you've got to either own or rent one of those medallions, and the rent doesn't come cheap. A good guess at the NYC price is $40,000 a year for the use of it for a 12-hour shift each day.

So after he's paid that rent, his gas, his insurance, and his other expenses, that cab driver is making perhaps $9 or $10 an hour. No matter how many fares he picks up, he's not getting rich. The economic explanation is that profits always flow to whoever has the rare and necessary part of the process. It can be skill, as in sports, which is why the players make such hefty salaries. Or in this case, it's the medallion, which is why the owner ends up with more than the cab driver. But Uber, Lyft, and the other companies change the equation because they don't need a medallion.

Changing the game

We can now find a new equilibrium in the split of money between the infrastructure (i.e., Uber, or the medallion-owning company) and the labor, or the driver. Uber can say that it will take less of the total revenue stream (a flat 20% at present) and still leave more for the driver.

Thus everyone -- except those medallion holders -- is benefiting from this disruptive technology. And with medallions costing a million bucks a pop, they're likely owned by the 1%, so it's a reasonable redistribution of wealth to the other 99%. And it's all happening not because anything is being taken from anyone, but because we're opening up a previously restricted market to competition.

That's what industry disruption looks like.

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  • Report this Comment On January 23, 2014, at 5:23 PM, Boston99 wrote:

    Uber is 100% fully-operational peer-to-peer taxi service that violates multiple rules and regulations. There is no magic to higher pay... Any for-profit

    company that doesn't pay same taxes and fees , doesn't follow same regulations, doesn't have

    same expenses as its competitors will end up with higher profit. Any other illegal operator would be

    have its license taken away but not Uber... At least

    not yet.

  • Report this Comment On January 23, 2014, at 6:14 PM, neamakri wrote:

    boston99 has some valid comments. This also points out that whenever govt. gets into private business, things get messed up.

    I have a solution. Uber should rebrand itself with the motto "Mobile Dating Service". That way if you call a ride on Uber, you are going on a "Mobile Date". Just say a few words to the driver and voila' the legal requirement has been fulfilled.

    What say Fools?

  • Report this Comment On January 24, 2014, at 12:31 AM, sliderw wrote:


    Good creativity! Too bad it won't pass legal muster.

  • Report this Comment On January 24, 2014, at 3:17 PM, laughtiger wrote:

    The problem with this analysis, as a taxidriver, the $1250 a week was what he was taking home.

    But as an Uber driver, he is paying his own vehicle maintenance and insurance costs, not to mention lease payments since he almost certainly does not own the vehicle outright. That comes out of his $1500. So the increase in pay is illusionary.

    The emphasis that we repeatedly hear about the impact of the medallion on cabdriver income is a red herring. In places like New York City the medallion rental is only a fraction of the price of operating the vehicle. In many other cities medallions cannot be bought or sold, so there is no inflated price.

    The key factors for cab income are who pays for what, and who assumes liability. Uber is just a new cab company that shifts more costs and liability onto the drivers. Plain and simple.

  • Report this Comment On March 25, 2014, at 1:50 AM, Jetson324 wrote:


    First, "a 40-hour workweek NETS him about $1,500". He is stating that he is earning $1500 over his expenses with the word "net" not "gross".

    Second, insurance costs and lease are irrelevant in this matter because as long as he owns his vehicle and is using it for personal use then he would have to pay those expenses, regardless. The cost of insuring it does not go up by using it for work, and not every Uber driver is "leasing".

    Finally, for you to state "Uber is just a new cab company that shifts more costs and liability onto the drivers" is exactly how businesses, with profits, operate. The article emphatically explains that it has opened up the market to new competition, thus, the new competition, while it does inherit the costs and liabilities, it also reaps the profits that would normally be reserved to those cab companies that earn a profit. So the profit that would have gone to the cab companies are now going to those that with scarcer resources the opportunity to become their own entrepreneurs and earn a profit on their endeavors instead of the profits going to those cab companies; which, as it was appropriately stated, are those that have the $1 million.

  • Report this Comment On November 27, 2014, at 9:06 AM, Londontaxi wrote:

    Alchemy or tax avoidance? if the latter then who pays down the deficit? in my opinion it's not gold that Uber have created but rather a double headed coin that is used to steal from the tax payer.

  • Report this Comment On January 17, 2015, at 4:05 PM, marcgarvey wrote:

    Laughtiger wrote:

    "The key factors for cab income are who pays for what, and who assumes liability. Uber is just a new cab company that shifts more costs and liability onto the drivers. Plain and simple."

    He is right about this. I've driven for a year and can testify that their is zero magic happening here. They make money with hyperexploitation of the guy who owns and operates the vehicle. Like other similar business models before it. If unemployment levels improve, Uber will be forced to either die or adjust rates to reasonable levels.

    Right now in Atlanta drivers are working for ¢0.38/mile not including dead time which is miles to the customer pickup. It's terribly shitty. Drivers are doing it out of necessity.

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