The Old New Business Model of Uber and Ola


Cars were a luxury in the early twentieth century. Their production was a slow and an expensive process. And this basically meant that the prices at which they were sold were also very high.

At the same time the car makers employed skilled craftsmen to produce cars. As Ryan Avent writes in The Wealth of Humans—Work and its Absence in the Twenty-First Century: “The automakers employed skilled craftsmen, who often had to shape these individual components to fit the peculiarities of the car’s handmade frame. In 1908 Ford Motor Company sold only about 10,000 vehicles. Most of its 450 employees at the time were highly skilled mechanics and craftsmen.”

This changed when Henry Ford came up with the assembly-line system of producing a car. This system was inspired from the meat processing industry in the United States. In this system, known as the ‘disassembly line’, the animal’s carcass hanging from a hook attached to a powered belt moved from one butchery station to another.

At each station, workers hacked off specific cuts of meat. As the animal moved through the disassembly line, its carcass grew smaller as the meat kept getting hacked from it. Ford thought that a system in reverse could be used to produce cars.

In Ford’s system, the chassis (i.e. the base frame) of the car was moved by power lines through various production stages. Various parts of the car kept moving towards the chassis at the same time. The workers were arranged at specific positions and they attached these parts on to the car. Hence, as the chassis moved through various stages of the production process, it became bigger and bigger.

In that sense, it was the opposite of the disassembly line and came to be referred as the assembly line. The assembly line was a major innovation and rapidly reduced the number of hours needed to produce a car from more than 400 working hours to less than 52 hours decades later.

At the same time, the cost of producing a car fell as well. This led to car prices falling and a boom in demand for cars. In the process, the production of cars went up as well. This led to an explosion in employment in car production even though the labour needed to produce each car had come down.

Also, the employees needed to produce cars on the assembly line did not need to be exceptionally skilled, as was the case earlier. As Avent writes: “The people working on the line were not especially skilled, for the most part. But Ford’s clever system meant that they were nonetheless fantastically productive.”

Cut to the 21st century. App based taxi services like Uber and Ola, are working around similar lines. Take the case of the traditional cab driver (or an auto-rickshaw driver in India). He was protected by laws and regulations. Most cities do not issue permits to drive a cab or an auto-rickshaw, on tap. Hence, there are a limited number of permits going around.

Also, more importantly, the drivers need to know their way around the city. If they don’t, they won’t be able to do their jobs. Uber and other app-based cabs have simply taken these things out of the equation.

As Avent writes: “Uber entered markets with a new business structure that took advantage of technology – smartphones equipped with GPS – that made the prior knowledge much less important… In doing so it allowed relatively unskilled drivers to enter the business in vast numbers.”

The point being that many more people could operate the smartphone than know the way around big cities like Mumbai, Bengaluru, New Delhi, New York or London, for that matter. Like in case of the assembly line, the cleverness of GPS technology, has essentially ensured that many more people can now become taxi drivers than was the case in the past. This has put the traditional taxi-drivers in trouble.

The question is how long will this last? As Avent writes: “New business models that open opportunities for unskilled workers by simplifying the tasks done in an industry arguably pave the way for the eventual automation of those tasks.”

The column originally appeared in the Bangalore Mirror on November 2, 2016.


Uber’s surge pricing shouldn’t just be about ‘good’ economics


Vivek Kaul

The two most basic laws in economics are the law of demand and the law of supply. The law of demand basically states that all other factors being equal the price and the quantity demanded of any good or service are inversely proportional to each other. The law of supply states that an increase in price results in the increase of the quantity of the good or service supplied.

These two laws are the heart of the business model of Uber. The price of the taxi-service goes up when the demand is higher i.e. more people want to use Uber cabs in an area than the number of cabs available at that point of time. The company calls this “surge pricing”.

On the face of it this pricing practice sounds normal. It is often compared to airline ticket prices where the prices during weekends, summers, festivals and end/beginning of the year tend to be higher because the demand is higher. Along similar lines Uber prices go up when the demand is higher. Nevertheless, the comparison is not so straightforward.

When the demand is high, the price charged by Uber starts to go up. There have been cases when the price has gone up many times the normal price charged by the company. A December 2014 article in the Time magazine puts the highest multiple ever recorded at 50 times the normal price. This happened in Stockholm, Sweden.

When terrorists took over a café in Sydney in December 2014, the price went up four times its normal rate. A similar thing happened in Toronto, last month, during a massive subway disruption in the city.

The company has a standard explanation for this—the law of supply is at work. Travis Kalanick, the CEO of Uber explained it on his Facebook page once: “We do not own cars nor do we employ drivers…Higher prices are required in order to get cars on the road and keep them on the road during the busiest times. This maximizes the number of trips and minimizes the number of people stranded.”

How good is this argument? As Richard Thaler writes in Mishbehaving: The Making of Behavioural Economics: “You can’t just decide on the spur of the moment to become an Uber driver, and even existing drivers who are either at home relaxing or at work on another job have limited ability to jump in their cars and drive when a temporary surge is announced.”

Further, “one indication of the limits on the extent to which supply of drivers can respond quickly is the very fact that we have seen multiples as high as ten”, writes Thaler. If drivers were actually responding to surge pricing quickly that wouldn’t have been the case.

Research carried out by Nicholas Diakopoulos of the University of Maryland (which was published in the Washington Post) suggested that: “surge pricing doesn’t seem to bring more drivers out on the roads”. What it does instead is that pushes drivers already on the road towards areas with higher surge pricing.

Also, in most cities which have taxi-cabs people are used to paying a fixed rate. Uber is trying to challenge that notion. The trouble is that while it is doing that it ends up with a lot of bad PR, during tough situations(like terrorists entering a city, weather disasters, transport strikes/disruptions) when the surge pricing tends to kick in. While “surge pricing” follows economic theory, what the company needs to realise is that they are charging the consumer more, when he or she is in a spot of bother anyway.

So what should they do? Thaler has the answer: “This insensitivity to the norms of fairness could be particularly costly to the company…Why create enemies in order to increase profits a few days in a year?…I would suggest that they simply cap surges to something like a multiple of three times the usual fare.”
Now that sounds like a sensible thing to do.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column appeared in the Bangalore Mirror on July 8, 2015

Money lessons from Uber

When it comes to technology I am a slow adopter. I got an email account only after most of my friends already had one. I started using Facebook and Twitter after these two social media websites had already taken off big time. Further, its been less than a year since I got a smart phone and given that I have only recently started using the app-based Uber taxi service.

For those who have used Uber will know that the company primarily offers three levels of taxi service. Its most basic service is uberGO. This is followed by uberX in the mid-range and UberBLACK in the top-range.

Further, the company does not take cash payments. In order to use Uber, you first need to create a wallet account with Paytm, transfer money into it from a bank account and then link it to the Uber app on your smart phone. The cost of the travel is deducted against the money in the Paytm account.

After using the Uber service, you don’t pay paper money or cash to the company. As mentioned earlier, the payment is deducted directly from the Paytm account. Hence, in that sense the situation is similar to when you buy something using a credit card or debit card.

And this is where things get interesting. Research shows that when people use their credit/debit cards they are likely to end up spending more in comparison to when they use cash, simply because there is no pain of purchase, as is the case when using cash.

Gary Belsky and Thomas Gilovich explain this phenomenon beautifully in Why Smart People Make Big Money Mistakes and How to Correct Them: “Credit card dollars are cheapened because there is seemingly no loss at the moment at the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”

The same stands true about using a debit card as well or for that matter a wallet account like Paytm, to purchase things. “In fact, the money we charge on plastic is devalued because it seems as if we’re not actually spending anything when we use cards. Sort of like Monopoly money,” the authors add.

Hence, as people don’t feel the pain of spending money, they are likely to spend more. “You may be surprised to learn that…you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash,”Belky and Gilovich write.

So how is all this linked to Uber? The area that I live in central Mumbai, uberGo, which works out cheaper than even a kaali-peeli taxi and is air-conditioned, is not so easy to get. On days I don’t find an uberGo I end up using an uberX which is more expensive than a kaali-peeli. And on a couple of occasions I have also ended up using UberBLACK, which is significantly more expensive than a kaali-peeli taxi.

The reason for this is straight forward. Since I don’t have to pay Uber in cash, I don’t feel the pain of paying and end up using a service which is more expensive than a kaali-peeli. In fact, since I am paying using a smartphone the pain of payment is even lower than when using a credit or a debit card, given that payment through a smart phone using a wallet is one more step removed from cash than a credit or a debit card.

This also explains why almost every e-commerce site wants you to shop using an app and not from their website. Since you may pay using a smartphone through a mobile wallet account, there is chance that you will end up spending more money.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on June 17, 2015