Uber and Doordash Fail to Meet Network Effect Expectations
This article discusses how companies such as Uber and Doordash, that offer ride-sharing or food delivery, have failed to dominate the market as expected. It especially notes how during the pandemic, Uber suffered greatly as many people were no longer in need of rides. On the other hand, Doordash flourished as many more people were getting their food delivered. Despite challenges with the pandemic, both companies reported profitability in recent days. The article also examines how there was an extreme investment craze during the initial startup of these companies — to an absurd degree that there was little doubt these companies would benefit from network effects.
The interesting point of the article is that it points out that network effects are actually much weaker than anticipated due to what it describes as “friction.” While people would think the initial heaping investments would push the public to expect a lot of others to use the app, there is inconsistency and disloyalty among users. For instance, many users switch between Uber and Lyft, using whichever is cheaper. Even drivers will switch between apps depending on which one pays more. This inconsistency has made it difficult for a single company to drive profits upward dramatically.
Connecting this to class, we can consider the Network Effects equilibrium graphs. While people might have initially thought that the large investments would drive the value of z somewhere between z’ and z” (thus causing z to eventually converge to z”), it appears that these outside factors have actually caused the expected value of z to be lower than z’, ultimately driving popularity downwards. These companies have tried to raise popularity again through other means such as Doordash now offering grocery delivery.
It is very fascinating to see how these very popular companies are actually failing to benefit from network effects. While the pandemic might have played a role in driving popularity downward to a point below z’, it is also possible that this so-called “friction” would have caused popularity to drop anyways.