Uber: An aggregator or co-partner?
The task for Uber is to determine how it envisages itself going forward — will it continue to position itself as an aggregator which charges a fee, or will it be a co-partner with its drivers, sharing with them the burden of running an enterprise
Uber has a habit of being in the news for all the wrong reasons. One of the main charges against the company is that it exploits the drivers that sign on to its platform. In the UK for instance, a Committee of MPs stated in April this year that “the hard to comprehend contracts seem designed to stop workers asserting their rights”. In the same month, a district judge in the US issued a temporary restraining order on a 2015 Seattle law that would give drivers for rideshare companies the right to join a union.
India, too, is no stranger to these struggles. When Uber entered the Indian market, it enticed drivers by offering them additional incentives based on the numbers of rides completed. Once Uber had enough cars on Indian roads, they discontinued the incentives, leading to a fall in earnings. Thus in February 2017, Uber drivers went on strike in New Delhi citing “low” fares and the lack of basic amenities provided by Uber.
To understand this ongoing dispute between Uber and drivers, it is important to understand the economic model of both actors. The economic model can be understood by applying the factor income theory to both Uber as an aggregator of a service, and Uber drivers as entrepreneurs who provide the said service.
According to this theory, factor income is a function of four factors of production — capital, labour, land and entrepreneurship. Applying this to Uber, capital is the money it invests in computers and other machinery to develop the app; labour is the wages it pays to its IT professionals, lawyers, and customer support staff; land is the rent it pays for its various offices across the world; and entrepreneurship is the charge levied by Uber on the driver for each ride.
Applying the same theory to Uber drivers, their capital investment would entail the initial down payment they pay to procure a car; labour would entail the opportunity cost of wages foregone had they been employed elsewhere; land (rent) would entail the monthly EMI they pay on their vehicle; and entrepreneurship would be the money they earn on each ride less the levy charged by Uber.
Differences between the aggregator and the car owner arise due to the fourth factor, that is entrepreneurship. Entrepreneurship is measured as the profit earned for bringing together the other three factors of production. Profit in turn is a function of price — an entrepreneur bringing together the other three factors of production and incurring costs thereof determines a price for the sale of its goods or services to make a profit. Should demand exist for the price set, an entrepreneur deems it viable to run a business.
The conflict between Uber and its drivers arise as Uber not only charges a fee for each completed ride, but also determines the price at which a driver undertakes the ride. The Uber driver, therefore, is an entrepreneur who has control over three factors of production, minus one, which is entrepreneurship itself.
To break this logjam, and to avoid strikes and regulatory hurdles, Uber can pursue one of two approaches.
In the first Uber should require individuals to purchase their own cars and take responsibility of the first three factors of production, it must surrender its role as the price determiner to the cab owner. This mechanism can be incorporated within the app itself — every time an individual logs on, she would get a list of taxis in the region along with the price charged by each individual driver. The customer can then choose — based on price, rating of the driver, distance, etc. — which cab suits her the most. Uber in turn can enter into individual agreements with drivers and charge a fee for aggregation. These contracts could be similar to existing ones wherein Uber charges X per cent of each ride, or could be a flat monthly charge, or even a mix of both.
The argument, therefore, is for a free market of taxis, where taxi owners play the role of entrepreneurs and determine the price of each ride based on their cost calculations; and Uber plays the role of an aggregator of these taxis for a fee.
Second, should Uber continue to determine the price of each ride, it would be to become a co-partner of the driver, and contribute to the other three factors of production. Uber was already working on this model in India by providing an incentive to its drivers based on the numbers of rides they completed each day or week. By paying Uber drivers over and above what they earned for each ride, the company contributed significantly to their EMI payments and the wages they had forgone.
Given that such cash incentive programmes might be unsustainable in the long run for Uber, it can contribute to the cause of drivers by providing them basic safety nets such as health and accident insurance, and even a minimum daily allowance.
The task for Uber, therefore, is to determine how it envisages itself going forward — will it continue to position itself as an aggregator which charges a fee, or will it be a co-partner with its drivers, sharing with them the burden of running an enterprise. As it stands, Uber will continue to face a backlash from regulators and drivers as it is attempting to have its cake and eat it too — this makes it an unviable economic model, let alone an unethical business practice.