Economic Analysis for Business Decisions

University of Central Missouri

Analyzing Taxi and Uber Data

in New York

Huang, Yi-Hsuan

Economic Analysis for Business Decisions

December 6, 2016

 Dr. David Johnson

Abstract

        This paper provides a comprehensive analysis of the competition between the sharing economy ride service Uber and the New York City (NYC) taxicab industry based on aggregated data. The popularity of Uber has grown considerably in recent years, but it has been having a tough time getting a major foothold in many cities, including NYC. Pressure from the NYC Limousine Commission has kept Uber from matching rates and services with many established taxicab services shunting its growth in the city. The aim of this paper is to analyze the impact Uber has had on the industry and determine if ride sharing has a pricing structure that is unfair to the industry or if ride sharing is technological change and a legitimate competitor that established businesses must learn to compete with if they are to survive.

Introduction

        Uber, the private car service company that has become the darling of the startup and tech scene in California, offers its service in many major metropolitan regions, including NYC, Seattle, Chicago, and Boston. As its popularity grew, questions arose concerning the possible negative impact Uber would have on local taxicab industries. This paper assesses this question by analyzing total miles of usage by Uber data as well total miles driven by major NYC taxicab services collected from the New York City Taxi and Limousine Commission. The research questions to be addressed by this study are 1) to determine whether Uber is cheaper in New York City and 2) to determine does Uber affect the Taxi industry in New York City.

Economics and Pricing

        Question one and two address whether low prices oftentimes associated “sharing economy” actually do have an adverse impact on local businesses or if players in the sharing economy are merely cost leaders that pressure other businesses to lower their prices. Consumers are always seeking the cheapest and most efficient way to obtain desired services and, as a result, prices become the focal point of competition in many industries. Guarantees of low pricing has also become a marketing strategy that is frequently used to lure consumers into the business. This being said, pricing must a balance between what the market will bear and what will allow firms to profit if the firms are going to remain viable. If supply and demand or efficient cost leaders create a pricing structure such that many firms in the industry cannot profit firms will exit the market until an equilibrium is reached. Increased cost leadership competition from Uber has forced this question in the taxicab industry.

Companies vary greatly in terms of their missions, strategic goals and service offerings, but every business shares the same overarching goal of generating a surplus and being profitable. In economics, surplus is the concept that describes the amount of utility or value that consumers and producers receive when a transaction is made (Hamel, 2015). Every producer and consumer desires to maximize their own utility and maximize their surplus. This sometimes creates a conflict of interest because consumers want to save while producers want to profit. An equilibrium between what consumers are willing to spend and producers are willing to receive is generally reached through the laws of supply and demand.

During the equilibrium creation process, some businesses may decide to obtain new customers by offering services below the market rate. The concept is to charge lower rates per transaction, but have more transactions which will offer more profit overall. In some instances other firms will follow by lowering their prices while others will respond by pointing out that consumers will “get what they pay for” and that low prices are not always a guarantee of better goods or services. The perfect balance between price and value is a difficult one for many businesses to obtain.

Uber and the Taxicab Industry

In some instances businesses can claim that there is unfair pricing competition if a new entrant is able to price well below market rates because they are more efficient and have lower overhead costs. This brings up the question of how Uber has affected the taxicab industry in NYC and whether or not its low prices and easy accessibility to consumers are unfair to other businesses and adversely impacting the industry as a whole. Uber is a unique model that is arguable not even a business, but nonetheless, has potential to take considerable market share from established local industries.

One issue with Uber is that it is very difficult to gauge how prevalent it is in a local economy since it has considerably low entry barriers. Essentially anyone with a car can become an Uber driver and compete with local cab services. This ease of entry means that competition can swiftly rise in poor economic times and diminish is better economic times. This makes it difficult for taxicab services to fully gauge their competition since its competition can be argued as a “phantom” competitor that comes and goes without warning.

There are numerous examples of the phantom competitor rising out of nowhere and seizing considerable market share. One example of this came from data obtained by the Austin Business Journal where the number of taxicab trips recorded by the three taxicab services in Austin, Texas (Austin Yellow Cab, Austin Cab, and Lone Star Cab) during the summer of 2015 was down by nearly 1/3 when compared to the summer of 2014. The majority of people reported utilizing Uber as an alternative. Essentially, the taxicab industry in the city of Austin suddenly lost 1/3 of its market without warning when Uber caught on in the city. In some instances the effects are worse. In San Francisco, the largest taxicab service in the city, Lyft Corporation, filed for bankruptcy in January of 2016. Similar events occulted in Chicago in March of 2015 and in Boston in June of 2015.

Methods

            To do this study, datasets were obtained from the NYC Taxi & Limousine Commission containing data from August of 2013 to June of 2016 on the miles driven by the two largest cab services Yellow Cab and Green Taxi. Another dataset is an Open Data from NYC that includes additional data including GPS details, timestamps, fare amounts, payment methods, and individual trip distances. Additionally, Uber data compiled by fivethirtyeight.com covering nearly 19 million Uber rides in NYC from April 2014 to September 2014 were analyzed.