Will two firms produce enough effective competition to benefit consumers?
The use ride-hailing services continues to grow in the US, and while there are a range competitors in some markets, like New York, in most places, nearly all ride-hailing is dominated by Uber and Lyft. The good news for consumers is that fierce competition for market share between these firms is helping to keep fares low, and promote steady innovation and change.
While our view has long been that we want to encourage a range competitors–”Let a thousand Ubers Bloom,” we said–that doesn’t seem to be happening yet. Austin, which was temporarily evacuated by both companies after a local voter-approved measure which enacted some restrictions (such as background checks for drivers), seemed to be a keen example of how new entrants could step in and fill the void. But this summer, after the Texas Legislature pre-empted Austin’s municipal laws, Uber and Lyft re-entered the market with a vengeance, and have apparently recovered most of their lost market share. Local startups are struggling against the bigger firms brand recognition and and deep pockets. One local startup, RideAustin, saw its business decline 62 percent after Uber and Lyft came back to town.
In the longer term, the burgeoning number of businesses developing autonomous vehicles are potential competitors for Lyft and Uber. Waymo, the Google/Alphabet subsidiary, has just launched its fully driverless cars in Phoenix, and as they scale up, they threaten to be a major disruptor in this market. But that development seems to still be a ways off. Will two firms in this industry be enough to assure vigorous price competition, and provide consumers with good value? Let’s look to see what’s happened here in the past few months.
Will a duopoly be enough?
Uber has been the dominant firm in the ride-hailing market since its inception, but in recent months there are signs that its dominance is ebbing. The company has experienced a series of widely publicized gaffes, ranging from sexual harassment claims against its executives, to a video of the company CEO disparaging one of its drivers, to the ultimate resignation of founder Travis Kalanick. The bad publicity, coupled with a #deleteUber campaign has had an impact. During most of the past calendar year, rival ride-hailing firm Lyft has grown faster, and picked up market share. Nationally, estimates are that Uber’s market share has fallen from more than 80 percent to less than 75 percent.
But the national statistics obscure a fiercer battle in many cities. Instead of being a weak also-ran, Lyft appears to becoming a sizable competitor in many markets. Data compiled by credit card analytics firm Second Measure estimates the market share of the two companies in different cities around the country. As reported in Recode, these data show strong improvements in Lyft’s position in many markets. Across the dozen markets shown here, Lyft has recorded 10 point or better gains in share in three-quarters of them. In general, Lyft has made the biggest inroads in major West Coast markets; in Portland, Lyft has a 45 percent market share, making it a very close rival to Uber.
A companion article in Recode examines the connection between the #deleteUber campaign and consumer use of the two services. According to Second Measure’s data, most ride hailing customers exclusively use just one of the two leading services (71 percent exclusively use Uber, 19 percent exclusively use Lyft). Only about 10 percent of ride-hailing customers use both. While customer loyalty to a single firm is something that every company no doubt wants to cultivate, the sharp change in the market share of the two companies is good evidence that switching costs are relatively low. Thus, even though only a small fraction of customers are regular comparison shoppers (using both services routinely), those who rely primarily on one or the other can easily switch if they’re dissatisfied. Low switching costs are one of the keys to getting the benefits of competition in a duopoly situation.
An intensely competitive duopoly in ride-hailing is likely to help assure better rates and better services for consumers than would be the case if one company achieved monopoly status. If customers are dissatisfied over prices, the service the receive or the company’s policies, they can vent their displeasure by switching to the alternative. This market share shift however suggests that the market valuation attached to Uber–almost more than $70 billion last year–may be far too high. While we may not see a thousand flowers blooming, an effective duopoly may offer the next best thing.