A Beautiful Duopoly
A beautiful duopoly – How economic theory can explain the competition between Uber and Lyft
This article discusses Nash equilibrium and competitions in the real market. It first introduces early theories of economic competition in history. Joseph Bertrand developed a thesis around an economic situation in which two companies dominate a market, formally known as the Bertrand duopoly. He proposed that in a state of duopoly, whereby players offer a non-differentiated product and are not in cooperation, their customers buy from whichever one sells it for cheaper. John Harsanyi examined the uncertainty around each party’s knowledge and understanding of the other’s decisions and how beliefs can be embedded into a framework of game theory. These games are called games of incomplete information. From Bertrand to Nash to Harsanyi, many companies have struggled with competition, conditions of duopoly, price pressures and survival.
The article then focuses on Uber and Lyft as an example of duopoly. It points out that in the very beginning, competitors know less about each other, but the longer they play the game, the more they will learn and make adjustments to their moves. Going public brings more transparency about each company so with that they will learn even more. The more each competitor will know about each other the more informed their decisions and responses will be so the rideshare game should ultimately reach Nash equilibrium. This is a great add-on to knowledge we learned in class about Nahs equilibrium. The author also emphasizes that companies have their preferences and payoffs set and analyzed in their decision making process. It corresponds to the idea that we examine valuations, prices, and payoffs in class.
Looking at the war between Uber and Left, the article states that the ability of companies to make calculated decisions at times of competition remains a vital piece of the puzzle. And it gives a two-step strategy. I can easily relate that analysis to our strategy analysis learned in class. Bertrand duopoly introduced here is a new but nicely relevant concept to our class topics.