Technology, Uber, and Matching Markets
Recently, there has been a change in the taxi industry due to new technological apps like Uber and Lyft. These new sources of technology have introduced a much more efficient way of transportation in major cities than when cities only had normal taxis. Authors Cramer and Krueger researched the difference in efficiency between UberX drivers and normal cab drivers.
Uber drivers on average work less hours and drive more passengers. These hired drivers are likely to be driving someone while they work for about 50% of the time, while normal taxi drivers are likely to have a passenger in their car only 32% of the time. This is most likely because Uber has a better network of drivers, and it integrates the internet in its system to utilize the theory of “matching markets.”
Normal taxis have a one way network system. Their drivers wander around the city looking for a passenger. In a less populated city, the system is inefficient (which is why densely populated New York is the only exception to this rule, New York’s normal taxis were shown to be nearly as efficient as Uber’s). Or, taxi drivers will use radios to signal where to go next. Both of these systems are very inefficient.
On the other hand, Uber has a two way network. It can match a passenger to the driver based on location and other preferences by using smart phones and the internet. With Uber, passengers can focus more on who they ride with. Thus, Uber’s network forms a much more efficient bipartite graph, where customers are more likely to get the driver they want in the least amount of time. Uber’s two way network eliminates wait time by an incredible amount.
Using the concept of matching technologies, Frechette, Lizzeri and Salz, researched how normal taxis would fare if they changed to a system that was more similar to Uber’s. If normal taxis utilized a two way network (so if taxi drivers had a knowledge of the location of their next passenger), then their efficiency rate would spike by 9.7%.
In addition, Uber allows more drivers to exist in cities. Because it has a much cleaner network of drivers to passengers, each driver can work a shorter amount of time for the same results. While normal taxi drivers drive around for their next customer, Uber drives simply go directly to their passenger and take them to their destination. Not only does this system allow for more drivers, it allows for more productive drivers. Perhaps it’s because of the shorter hours, but Uber drivers have a 38% higher capacity utilization rate. Uber drivers can charge 28% less than normal taxi drivers and still make the same amount of profit.
In conclusion, technology allows UberX drivers to use the theory of matching markets to create a more efficient network of taxis. It allows passengers and drivers to match up in a more accurate bipartite graph, thus increasing profit and decreasing working hours.
http://www.nber.org/papers/w22083.pdf