Informational and network effects in the Lyft vs Uber battle
The long-standing battle between Lyft and Uber has a lot to do with controlling a market where both informational and network effects are very prevalent. But the informational and network effects have different effects in this case. See, both Lyft and Uber have two distinct customers, their drivers and their clients. In order to succeed, the ridesharing moguls has to ensure that they have a lot of each, because each driver or rider can only get a benefit from the company if one of their counterparts is readily available.
With this in mind, let’s now think about how this impacts the informational and network effects at play. With the informational effects, each side of the service (driver vs. rider) only cares about what the people on their side of the service are saying about it. If a rider knows one rider that loves riding with Uber and one driver that loves driving for Lyft, he will only really consider the rider’s recommendation because that is what directly affects him. Similarly, any driver that reads the attached article that proclaims the driver’s absolute preference for Lyft over Uber will feel inclined to drive for Lyft.
On another note, network effects work in exactly the opposite way. If anything, more drivers is a bad thing for other drivers, like having more riders is a bad thing for other riders. In either situation, it increases the time that it takes to find a counterpart that will result in a ride. That said, having more riders makes it better for drivers because there will be less waiting time between rides, leading to more money. Likewise, having more drivers is better for riders because they will be picked up quicker.
It will be interesting to see how this relationship plays itself out in the real world. Lyft prides itself on being the preferred option for drivers. It encourages its drivers to engage with riders and has a tipping feature that brings in more income for the drivers. There are a lot of informational effects among drivers that lead more drivers to turn to Lyft, and this leads to an increase in the number of riders that choose Lyft due to the corresponding network effects. However, Uber has a reputation for being the smoother, preferred ride amongst riders. This leads to more riders choosing Uber, which leads to more drivers driving for Uber to reduce wasted time.
Currently, Uber has a much larger market share than Lyft, and is continuing to grow at a faster rate. Whether or not the informational effects of drivers’ apparent preference for Lyft can bring Lyft back into the forefront of the conversation will be intriguing to see.
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