Can Uber leverage the network effect?
In class, we discussed network effects, specifically in technological adoption. For instance, one’s decision to purchase a fax machine is dependent on how many others are utilizing this same technology to allow for an effective mode of communication. A more current example would be how one might consider the number of their contacts who use Apple devices before purchasing one themselves so that they are able to use applications such as FaceTime and iMessage seamlessly.
Similarly, Uber, a ridesharing service which connects drivers to passengers is largely dependent on its network effects and its ability to secure the market share. Hence, as I was interested in finding out more about the challenges in leveraging on network effects for a ridesharing company that is in the midst of establishing itself, I looked into a The Upshot article, a new politics and policy venture of The New York Times, which looks into this issue in greater detail.
As the middleman, Uber strives to grow both its network of drivers and passengers. Drivers want to be part of the network which has the most active passengers to increase their likelihood of securing a passenger who is located near their current location to minimize travelling distance and time. Likewise, passengers are attracted to networks which has the most drivers to increase their probability of finding a driver who is nearby so that they can get their ride as soon as possible. Once Uber has secured this huge network and leveraged on these network effects, they are likely be the default choice for ridesharing services. This is similar to how YouTube is the dominant video sharing website as they have a large network of videos and people looking for videos.
The challenge for Uber would then be in its price setting of its services. By setting a lower price, Uber might lose some of its profitability in the short run. However, this might allow it to grow its customer base and fend off its competitors past the tipping point so that it can utilize the upward pressure of its demand to grow its market share to a stable equilibrium and entrench itself as the market leader.
http://www.nytimes.com/2014/06/14/upshot/ubers-real-challenge-leveraging-the-network-effect.html?partner=rss&emc=rss&_r=0&abt=0002&abg=1