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Long Waiting Time for Your Uber Driver? It’s a Feature. Not a Bug
Recently, there were several interesting articles regarding the gig economy and the struggles that both customers (high prices and long waiting times) and firms (convincing drivers to go back to work), in particular Uber and Lyft, are facing.
Both are, of course, related. If there are enough drivers, waiting times will become shorter and prices will become lower.
But the interesting angle here is that COVID, and the “break” it imposed on people, is giving us an opportunity to dig deeper and examine some of our assumptions about the future of the gig model, both in terms of employment and in the services delivered.
Let's start with the primary cause. When COVID hit and lockdowns started in March 2020, there was a significant drop in the number of requested rides. From the analysis that was done in Chicago, it seemed that it was demand-driven rather than supply-driven. Particularly in Chicago, the demand for rides dropped by approx. 40%, compared to March 2019 and to February 2020 (when COVID was already prevalent in other countries, but not yet in the US). At the same time, the number of drivers was only down by 2%, on average.
This meant that drivers were willing to continue to drive, but customers were unwilling to use their services. Waiting times and prices remained low (high in some places, but to a large extent low).
And then, finally, things started recovering. People started to get vaccinated, offices and restaurants started to open up, and since some people still felt uncomfortable using public transportation (given the inability to maintain social distance), demand for Uber and Lyft has started to pick up.
And this is where issues began to appear. If you have tried ordering an Uber recently, you will have realized that prices are higher than expected.
"Uber fares in April cost 40% more than they did the same time a year ago, per data from research firm Rakuten Intelligence, first reported by The Times. This has risen to 50% and higher during recent periods of surge pricing when Uber hikes up pay to attract more drivers to areas with high demand, Wedbush analyst Dan Ives said, per The Times."
Prices are not pre-determined by these platforms but rather determined by an algorithm that is trying to match supply and demand, in real-time (and I am clearly simplifying things here).
So, what is the root cause of all this? It seems now that drivers are the ones who are unwilling to go back to driving.
Short Supply of Drivers
There are several reasons why drivers are not willing to return to work. Some are obviously health-related. Initially, drivers continued to drive even when there were no customers, but this was before we were able to fully understand the health implications of COVID. Now that we better understand the health consequences, fewer drivers are willing to take passengers, especially when they don't know their vaccination status.
A second reason is related to stimulus checks. Driving for Uber is not a high-paying gig (no pun intended), and requires a lot of effort, both physically and in terms of car-related costs. When given the option of not working, people choose to do so. We see similar behavior in the restaurant industry, which is suffering a shortage of employees.
“When employers say they can’t find the workers that they need, always add the phrase, ‘at the wages I want to pay,’” said Heidi Shierholz, director of policy at the Economic Policy Institute. “We know how to attract workers: give them better jobs, better pay, better working conditions. It’s not rocket science; that’s how you do it.”
There is also a third reason, which is actually quite interesting, and very specific to the gig economy.
"Some of the drivers said they realized the ride-hailing gigs were not the same jobs they signed up for in the early days of the apps. In the early days, they were incentivized with promotions and what they regarded as sustainable wages, taking more than $1,000 in pay from a full workweek. But as the apps took off, pay models changed and earnings slowly dwindled as drivers saw their weekly pay fall into the hundreds. It’s very much not a career,” said Lyft driver Bruce Blood, 34, of Los Angeles”
Many of these drivers realize now what they didn’t fully understand when getting into the gig economy employment.
In most organizations, as an employee, you expect the way you are treated only to improve over time. The longer you are with the firm, the better you are treated. In the gig economy, this is not always the case. You are not an employee. You are actually closer to being a customer of the platform, but simply on the other side of the market.
When you are a customer and get new cable service, you know that the service and the price are going to be great initially, but that over time, it's going to get worse, once the firm realizes that the switching process is not all that simple.
Subsequently, in the same way that cable firms treat us, the gig platforms treat their drivers.
From the statements above, it is clear that drivers have not fully realized that all of the perks and high-paying bonuses that they enjoyed initially, won’t be there forever. Many of them didn’t realize that the prospect of working in a gig job means that you are always “competing” for the next gig. And while there may be nothing wrong with that, it is not a cozy 9-5 job. Many of the drivers, 40%, based on our estimates, are multi-homing, which means they can continuously shop between firms. However, this becomes exhausting.
So this COVID-imposed “break” is clearly prompting some drivers to introspect. Is it having the same impact on the firms or the customers? Not as much.
But this is a great opportunity for us to do exactly that: discuss the limitations of the gig economy and seek out why it is such a powerful model.
The Economics of the Gig Economy
The fact that prices are surging is a feature of the gig economy, not a bug. If there is indeed a shortage of drivers because they are reluctant to go back to work, prices will increase. And as prices increase, drivers will, eventually, return.
Why am I so sure? My study with Maxime Cohen and Park Sinchaisri shows two important considerations: One is that drivers do respond to prices. The higher the price, the more likely they are to drive, and for longer. If this is not surprising, the next point should be: We detect a strong inertia behavior; the longer a driver has driven until now, the more likely they are to drive in the next time period (hour or day), and the longer they are going to drive.
And this is why it is so hard to bring these drivers back. They currently lack the inertia of driving day after day. However, there is a flip side. Once these drivers go back to driving, they are much more likely to continue driving. It’s a matter of attempting a cold start.
Nevertheless, this is speculative. We know that once drivers are back to driving, they are likely to continue, but we are not sure about the opposite. It's possible that breaking the inertia was actually a positive thing in prompting drivers to examine their trajectory.
But this only amplifies the importance of financial incentives and brings me to the starting point of this post: Prices will go up. So, if you are one of those who complain both about the surges in pricing and the working conditions of the gig economy, you should know that you are probably wasting your time. You should either be willing to wait or be willing to pay a higher price or both. Otherwise, you are better off using another mode of transportation.
The entire discussion above highlights one of the main challenges for firms and consumers when it comes to the gig economy:
Gig Platforms: They do not have a set capacity. So, if the platform wants to guarantee short waiting times, it must do so by having “excess capacity” of drivers that are just waiting for their next ride. Now, since these drivers are not paid by the hour (usually) but are paid by the distance driven, the price of the ride itself has to go up to compensate for both the wait time and the time they are idle.
And this is exactly the main feature of the gig economy: The platforms will always need to compete on supply. That’s where the cable provider analogy above breaks. Cable network providers know that our switching cost, as a consumer, is high. So they don’t really care about retaining us with perks and good service. For gig firms, this is not the case. The switching cost and the homing cost (the cost of being on two platforms) are low, both for customers AND drivers.
Customers: As a customer, you cannot really blame the platforms for the long waiting times. You can blame them for the low pay, you can blame the firm for treating the drivers unfairly, or you can blame the firm for surge pricing. But you cannot blame it for all of the above.
However, reading the comments under the recent articles I mentioned in the beginning, one can see that this is not the case. People blame Uber for the high prices, while drivers blame Uber for luring them and then mistreating them, and for having to deal with angry customers.
The implication: This is a market that is always going to be in flux. Platforms are not about customers OR drivers. In the case of two-sided markets, you need to be treating both sides well. You may underpay or provide harsh conditions for some time. But in reality, people have options.
As customers and citizens, our goal is to make sure people do have options. To make sure that there will be constant competition for both riders AND drivers. As consumers: don’t use just one platform. Ensure multiple ones continue to survive so the market does not converge to a winner-take-all. As citizens: push to have the government offer gig options to its residents. And maybe, just maybe, to regulate.