The Impact of Germany’s Stop of Uber

A German court ordered Uber to stop offering its taxi services (for now). The argument was as to be expected: Uber taxi drivers and cars are not fit for the job. This is definitely the right decision under the assumption that the German taxi approval rules make sense. Even if the court decision stands, this is not the end of Uber (nor Lyft nor AirBnB nor Wimdu as same or similar business model based companies).

I see two distinct innovations in Uber’s model:

  1. Higher service quality (mostly improved convenience) through the Uber app (and the system behind it)
  2. Lower costs of operations by utilizing drivers and cars who couldn’t or wouldn’t become taxi drivers

I think #1 is a justified and sustainable advantage: It just is easier to use an app rather than the phone and the more efficient and feedback-based system behind it. If Uber was a regular taxi service accessible through this app, it would already kill the market.

Whether advantage #2 is proper or not I don’t know. If current taxi requirements are exactly right then Uber will have to meet them in order to compete so this advantage will go away. In all likelihood, however, many of the current taxi rules and regulations are stale and only protect those who have already been approved. Then these rules need to be changed to allow for more competition and innovation. So then Uber will have to get more safe and the cost advantage will go down in equal measure; German taxi companies will have to accept lower-cost competition with relaxed regulation. Whether this will happen I don’t know. Rules and regulations don’t change easily and entrenchend incumbents will fight tooth and nail to keep it that way.

Whether it is a win for consumers is not clear either. Right now, by current rules and regulations, it is not safe to use Uber, but lets assume it manages to shake up the market. Then, in terms of safety, the state, the taxi companies, and Uber will have to meet in the middle, still providing safe passage. With these changes will come other changes, most notably Uber’s surge pricing. You may remember Coca Cola’s experiments with price surges on hot summer days? Where they raised the price of Coke bottles in their vending machines with increasing temperature? It left many destroyed vending in its wake. Uber drastically raising prices when there is high demand for taxis is another example of this strategy.

Thus, buyer beware: Consumers may benefit from a relaxation of barriers to entry to entrenched markets, but at the same time rolling the dice anew may change other aspects of the business model that not everyone may appreciate.

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  1. Evan Avatar

    Hi Dirk,
    I can’t stop thinking about the thread above and have some more thoughts about Uber surge pricing. Surge pricing is more common than one might think. Most service industries use surge pricing on a daily basis – hospitality, rental cars, airlines, etc. I just checked Avis and the rental rate for a full size car at Miami Airport on Monday, December 22nd – during holiday week – is $193.72. The same car on Monday, January 5th was $70.87. Avis has applied a 2.7x surge pricing on their cars. The same can be said for a hotel on South Beach or a flight from any major airport to Miami. This pricing ensures that customers can get a car/hotel/flight if they really want one.
    I lived in New York City for 8 years and one of my biggest frustrations living in the city without owning a car was trying to get a taxi when it was raining – virtually impossible – or during the taxi shift changes which occur during the afternoon rush hour – also virtually impossible. Try to get a taxi during the afternoon rush hour when it’s raining! With Uber and their surge pricing, a ride is available quickly 24x7x365, rain or shine.
    It makes sense that Uber would use surge pricing to ensure customers can get a car when needed.

  2. Evan Avatar

    Surge pricing is key to Uber’s model. It ensures that there is ALWAYS a taxi available is someone wants one – increasing the price during surge pricing times increases the supply of drivers and decreases the demand from customers (in San Francisco, during rush hour surge pricing times, Uber has to offer drivers a minimum earnings of $40 per hour – regardless of number of rides the drivers get – to entice them to drive to San Francisco during rush hour so that if a customer needs a ride, they can get one. Without surge pricing, the supply of cars would not be available and customers would be left high-and-dry without a ride – just like they are under the existing model of a fixed number of taxis in a city.
    I heard that in New York City (where it is virtually impossible to get a taxi on New Year’s Eve) Uber is priced at $100 per ride. Who wants to drive a taxi New Year’s Eve?!?! Well, at $100 per ride, there are enough drivers willing to forgo their partying so that anyone who wants a ride can get one – albeit at a steep price.
    A rider knowing that they can rely on Uber for a ride ANY TIME if really needed and willing to pay the price is so important to the success of this better mousetrap!

    1. Dirk Riehle Avatar

      @Evan That’s what Uber might argue. But it really is just one solution to managing ride supply. The traditional solution is to a charge fixed fee implying you have to wait possibly for a long time. The Uber solution is to charge possibly a large amount without having to wait.
      The economically efficient solution (and the best for the consumer) is to let a consumer name their price and as he or she is dialing up or down the desired fare, the wait time grows or shrinks. That would be another real innovation.
      Given that so many Germans are so price conscious, might this give us a new bicycle service?

  3. Michael Jastram Avatar

    You hint on it, but let me make it explicit: Uber is successful in those places where the market mechanisms of supply and demand don’t work. In many places all over the world, governments artificially limit supply (issuing a finite number of licenses) and artificially fix prices. This creates a gigantic profit pie for those willing to break the rules.

    1. Dirk Riehle Avatar

      Yet, @michael I agree, but I simply didn’t want to say this about the German situation as I don’t know enough about how broken the market is here…

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