Uber drivers’ collective action problem
I’ve been enjoying thinking about ways for Uber drivers to game the surge pricing algorithm at Uber. I don’t know how it works, exactly, but I’m going to imagine that it’s along these lines:
- there are well-defined neighborhoods in a city. This seems to be corroborated by the way the Uber app works for both drivers and riders.
- in a given neighborhood, there are two groups: people asking for a ride who haven’t yet been picked up, and drivers looking to give a ride.
- If the number of riders is 5 more than the number of drivers, then it becomes a “surge zone” for some amount of time, say 30 minutes.
Of course, I made up the numbers 5 and 30, but I’m guessing it’s more or less of this form, and those particular values don’t matter for the rest of the discussion anyway.
So here the thing, Uber wants to keep their riders happy, but to do that they actually tend to want to avoid creating surge situations, since surge situations usually imply riders wait longer and pay more. On the other hand, Uber drivers prefer surges, since they get paid more, and sometimes much more.
That means Uber drivers have a great incentive to game the system and create artificial surges. One way they can do this is by waiting outside an area that might become surge, wait for it to become surge, and then go into that area and swoop up a rider.
But it would make a lot more sense for drivers to work together to do this. Imagine what would happen if all the drivers agreed to sit together in some central location, wait for surge pricing somewhere, and then assign people in order to go get those riders. Pretty much all the rides would become surge. Again, that wouldn’t make the riders happy, but it would benefit the drivers.
All they’d need to coordinate this is something like a walkie talkie system. Or an app. And oh, wait, such a thing already exists, and it’s called Blinkr (hat tip Alex Rosenblat). Instead of congregating in the same place, though, they had an even simpler idea, namely to turn off their Uber app, thus decreasing the local supply of drivers, then wait for surge pricing.
It’s something like an Uber strike, and it requires coordination, but I don’t think it’s illegal, right? I mean, Uber can’t fire them for doing this, since they aren’t employees, right?
mathbabe 
They don’t need uber. They just need an app and a co-op.
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This immediately falls into the same trap as many mathematical/social games.
You are in a group of 30 people. You are given a choice. Your choice will determine your reward. If you choose A, you get $10 more than if you choose B. But, for every person in the group that chooses B, everyone in the group gets an additional $1. In homogenous groups with strong ties, you’ll get a lot of people choosing B. In a heterogenous group fragmented by culture and language, you’ll get a lot of A.
Which do you think typifies the drivers for Uber?
It also doesn’t help that for the driver there’s real risk in engaging in these activities, most in direct loss of fares.
Uber is also not the only player in town. There are other groups that are willing to provide rides in exchange for money. The other groups take cash and will pick you up with the mere wave of a hand.
For Uber itself, there’s a group of very smart people who can sit down in a single room, discuss the situation and come up with great solutions to counteract the efforts of the drivers. But again, there’s a tradeoff. When you pay your driver twice as much, uber’s cut is (just a little less than) twice as much. They make more money too, unless they drive passengers away, and the passengers just decide to take a cab instead. But for uber it’s a slight tradeoff, more $$$ per rider but fewer riders. There’s a balance. For the drivers involved it’s often a balance between zero and something-other-than-zero. When you have kids to feed, you don’t get the luxury of taking the risk.
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Another article along somewhat similar lines was this:
http://motherboard.vice.com/read/ubers-phantom-cabs
Uber can’t _fire_ the drivers, but presumably it can, even more easily, decline to hire them. I wouldn’t think that the drivers could get away with this very long.
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Steven, you bring up an excellent point.
Why uber at all?
There are other apps that existed before uber, and there are other apps that exist now. Curb, Cabulous and others tried to attach people needing rides to people willing to provide these rides.
But they didn’t do very well. They weren’t heavily advertised and they didn’t get as much publicity and traction as fast as uber did. Another extremely big issue is that in all the big dense markets, it’s simply illegal for you to pick up someone you don’t really know for money. In NYC cabs have medallions, and if you’re caught trying to run a gypsy cab without a medallion, then the fines are large, and they take your car.
Uber takes a huge cut of the fare (~25%), and they get to set the fare price. They get to do this because they are the 800lb gorilla in the market. They are also worldwide, so travelers who don’t want to try to figure out what the local taxi company phone number is can just pull up their uber app and get a ride. The passenger doesn’t need to figure out the legality of it.
Uber stepped into a lot of markets and just operated illegally until they got big enough to influence politicians and get their actions made legal. They have, in turn, erected legislative barriers to other companies doing exactly what they’ve done and undercutting them. In Denver, to be a Transportation Network Company, you have to pony up some cash (100k or more) and your drivers have to go through some of the same crap that cabbies have to go through.
It’s a much more complicated issue than most people think.
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You’re assuming that demand for Uber remains unchanged in the face of consistently higher pricing (and longer wait times) and that there is cohesion within the group of drivers. I think you’re also assuming that Uber statically keeps its surge algorithm unchanged as it watches this unfold – those don’t seem like awfully realistic assumptions.
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I’m not a fan of Uber after two bad incidents, but I do use Lyft and yellow taxis. What a driver told me is they can join many services and then turn on the app of their choice for a particular area and/or a particular time. So, yes, they in essence are playing a game, but no collusion, AFAIK, exists. Even in glorious Manhattan there are times and places when you just cannot flag a yellow taxi (for example weekdays at 6 pm on E 53 St between Park & Madison). So Uber, Lyft, Via or a car service come to the rescue. And to avoid the question of why not take the subway on that block, my wife is disabled, and most subway entrances don’t have elevators. I’ve had Lyft drivers lie about how far away they are, and when I call them they fake garbled cell phones, so if an empty yellow comes by, I just cancel the Lyft. Having Uber, Lyft, etc in their tailwind has made yellow taxi drivers more passenger friendly, and it has shifted power to passengers.
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If all drivers in an area cooperate they can gain monopoly rent and so benefit. However, there are incentives to be the one non-cooperator among a group of cooperators. “Free-rider” drivers would benefit from lowered availability of drivers in an area without incurring personal cost such as a forgone fare.
Is an Uber driver (independent contract driver) more likely to live paycheck to paycheck, or do they provide service as a way to gain desired, but not necessary, income? Of these profiles, which is more likely to cooperate?
Replicating an incentive system to work among all similar competing driver services such as Lyft seems less of a challenge than overcoming the incentives against cooperation.
How can one detect cheaters and then enforce cooperation?
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I know next to nothing about how Uber surge pricing works but if it works anything like you say, then I think there’s as much a principal-agent as there is a collective action problem. Uber owners/management would be the principals and Uber drivers the agents. Uber owners/management have an incentive to come up with a set of rules to get drivers to behave in accordance with their interests instead of acting merely in their own (the drivers) interests. There’s a whole area of economics which addresses these types of problems but I don’t know if it’s looked at Uber yet.
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