Network Effects in Ride-Sharing Services in Québec
The article above reports on the Quebecoise Government’s recent decision to extend the “Uber pilot project” for another year. The author explains that this decision was made so that government researchers can better “study the effects of platform-mediated services” to determined how best to “level the playing field between new entrants and incumbents”. Paradoxically, such a decision may actually hamper the ability of new entrants to make a stand in the market, because of the nature of Uber’s “network effects”. The author worries that left untouched for a full additional year, Uber’s position in the market may strengthen as its user base grows. This would make it more difficult for a loyal customer base to switch to alternate technologies when the pilot project ends.
The above situation can be more concretely analysed using some of the techniques learned in class. Let us say that Uber has some user base z and a user x values the service at rU(x)f(z). Since Uber will be a “monopoly” in the market for an additional year, we expect the number of users to increase (barring any sudden and major increase in the price of the product) and hence we can safely assume that the expected number of users is past the unstable “tipping point” z’ and well on its way to the stable equilibrium z’’ for some price p* charged for the service.
After this 1 year, some new entrants will be allowed to participate in the market. Now, let us assume that a new, very innovative ride-sharing company A wishes to join. At the current user base z, a consumer x would have a total reservation price of rA(x)f(z). There are two possible scenarios now:
1) user x values rides offered by Uber more than company A. In this case, there is no incentive at all to switch to company A, and so company A will never be able to gain a significant market share.
2) user x values rides offered by A more than Uber. That is, we require rA(x)f(z) > rU(x)f(z). Assuming that both companies offer their services at the same price p*, A might not be able to survive in the market since most consumers are already accustomed to Uber. This is because all of x’s friends are currently using Uber and even though x feels that company A might offer something better, the reservation price rU(x)f(z) is already greater than or equal to the price p*. In other words, there is no downward pressure on the fraction of the population using Uber, since the users are not paying a price greater than their maximum possible reservation prices (there is no strong incentive to switch).
Of course, the above is a simplified model for new competitors in the Quebecoise market, assuming that prices are relatively the same across all service providers. If a new entrant would be willing to significantly cut down its price, then it is possible to grow a user base as the company would effectively be pulling the tipping point equilibrium fraction z’ closer to 0. This would allow for user base growth, at the expense of profits, and the company would have to weigh the effects of both before deciding to enter the market.
Moreover, user preferences can be fickle and difficult to fully capture. As the author correctly argues, it is possible that local technologies might be favoured more than outsiders, and therefore it is possible that Uber’s grasp can be weakened with the right advertising. Local companies would have the advantage of being able to identify “social influencers” in the market; they could target those individuals with the most power to influence friend circles to switch products. The ride sharing market itself is very homogenous, as different companies don’t offer too much differentiation in their services. Therefore, in the long term, users can make use of services that inform them of the cheapest ride option given a particular time and location. This may make it easier to increase competition in the market, if only slightly. It is also possible for Uber to grow complacent with its power and for customers to begin preferring more responsive and innovative start-ups.
Thus, there are numerous possibilities that may allow further diversification in the ride-sharing market in Quebec. One thing does remain almost certain however; an effective one-year extension to the monopoly power and network effects of a strong company such as Uber will make it difficult for new entrants to play ball.