How Uber Increases Driver Profits While Being Cheaper Than Traditional Taxis

New competitors don't typically raise the wages in an existing industry, but it appears that's exactly what Uber is doing.

Jan 23, 2014 at 4:55PM

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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