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Uber Network Effects

Uber, a popular ride-sharing company, has long dominated the ride-sharing market. Uber is a smartphone app that provides a taxi-like service to easily pick up and pay for a ride to anywhere, so long as Uber is available in your city.

Uber’s value relies on network effects, i.e. the benefits that come with a large group of people using the product. The more clients that ride with Uber, the more demand there will be for drivers, which results in more Uber drivers around. When there are more drivers and clients, it is much easier, for both sides, to get a ride at odd hours of time, from different pick-up locations, and with shorter waiting times. Because this increases the value of an Uber experience, this attracts more clients, which continues to perpetuate this positive feedback loop.

This ride-sharing product, just like any crowd-sourced product, requires a large number of users to make the product viable. Therefore, even if other competitors could provide the same intrinsic service, say, an app that connects drivers with riders, they still need a large enough user base to actually be competitive.

With so many people using Uber, how can anybody else enter the ride-sharing space? Younger companies such as Lyft and Sidecar have emerged as successful competitors to Uber, and they have siphoned off market share by offering free rides, offering ride credit to those who refer friends (which increases the number of overall users), reducing fares (attracts customers), and reducing Lyft’s commission (attracts drivers).

There is also a concept of a tipping point, some threshold of users, where, once there are enough users, the value of the product will increase up to some equilibrium point because the extrinsic value of the product, due to network effects, is large enough to make the product attractive to customers. Uber and its competitors only make their service available in large metro areas where they have already signed up a large base of drivers so the product is released at a point past the tipping point. When Lyft announced their launch in NYC, they already had thousands of drivers revving their metaphorical engines, ready to pick up clients. This is why Uber is not available in our humble Ithaca; there is not a large enough network of customers and drivers that would result in an attractive value for the service.

http://www.nytimes.com/2014/06/14/upshot/ubers-real-challenge-leveraging-the-network-effect.html
http://www.cnbc.com/2014/07/29/lyfts-sacrifice-for-the-sake-of-its-nyc-launch.html

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