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Uber: Nobody Wants a Worse Ride

David Sundahl, 9/15/2016


Typically, disruption raids a mainstream market by causing customers who are “overserved” by existing solutions to buy a “worse” solution. We buy budget laptops and fly cheaper airlines. But in an industry such as the taxi industry, where prices are fixed by the state, firms have little reason to move up-market—to pursue better service or additional services. To make matters worse, the competition over medallions—which grant the right to operate a taxi—squeezes margins further. Gaining dominant marketshare is doubly unattractive to a taxi company. First, if the company must pursue better service, they gain nothing in terms of the price they can charge. Second, capturing greater marketshare is either prohibitively expensive—according to my own informal research, medallions in Boston have traded as high as $1 million—or impossible—due to regulations that limit the total percentage of a city's medallions that one firm can control. So here is the rub: Uber doesn’t look disruptive because it didn’t take root in the low end of the market. And many smart people have tried hard to make the case that it created a totally different job to be done. But I take a slightly different view. Because taxis could not move upmarket, Uber entered by changing the basis of competition. Nobody wants a worse ride than a taxi ride, but we’re willing to switch because Uber is (just a little) cheaper and (much, much) more convenient. Uber has changed the basis of competition by moving us from thinking about the solution provided to thinking about how Uber eliminates almost all of the hassles we associate with taxis. The regulation of pricing and the artificial scarcity of medallions combined with open markets for medallions created a situation where disruption happened by changing the basis of competition. Regulation prevented upmarket movement or market domination, but could not do anything about cost, convenience and access to point-to-point transportation.