Soaring prices and longer wait times are frustrating customers of Uber and Lyft as the ride-hailing companies scramble to meet demand that is slowly returning to pre-pandemic levels.
But Wharton’s Gad Allon wants to let those customers in on a little secret: The fact that prices are surging is a feature of the gig economy, not a bug.
“I think no one is happy at this point. Customers are not happy, drivers are not happy, and Uber is not happy,” he said. “There’s a big debate, ultimately, on their employment model.”
Allon, a professor in the department of operations, information, and decisions, wrote about Uber’s disposition in a blog post and spoke about it during an interview with Wharton Business Daily on Sirius XM. (Listen to the podcast above.) He said the long break in ride-hailing that was caused by the COVID-19 pandemic has spotlighted the gig platform and the role consumers play in ensuring fair competition in the marketplace.
Where Are the Drivers?
Like many other service-based companies, Uber and Lyft have said they are struggling to find enough workers as the economy roars back to life. Uber reported that it had 22% fewer drivers in the first quarter of 2021, compared with the same period last year, and announced a $250 million investment to recruit them through incentives and bonuses.
The loss of supply (drivers) and increase in demand (rides) has pushed fares into the stratosphere. Research firm Rakuten Intelligence found the cost of rides on Uber and Lyft was about 40% higher in April than a year ago.
Allon cited several reasons why drivers aren’t getting back behind the wheel in droves, including continued worries over health risks and the small financial cushion provided by the federal stimulus. But the biggest factor is the realization that working for a gig platform isn’t all that beneficial.
He said the pay, conditions, and overall treatment of drivers deteriorated over time as Uber scaled back spending during the run-up to its IPO to show investors that it was viable. Now, as the company tries to bring drivers back with promises of more money through surge pricing and incentives, those drivers are questioning whether the work is worth it.
“The drivers are saying, ‘Well, we’ve been to that movie already. We’ve seen you trying to lure us in. Once we’re in, you’re going to remove these benefits, you’re going to remove these advantages, and we’re going to be stuck again doing many, many short rides for very low pay,’” Allon said. “Tell us how this time it’s different.”
The professor has been studying the gig economy for years and noted in a 2018 research paper the effect of “inertia behavior” in the decision-making of on-demand drivers. In essence, the more drivers work, the more likely they are to continue working. The pandemic’s forced idle disrupted that hustle, creating inertia among the drivers.
“In the day-to-day, you’re chasing the next ride,” Allon said. “Many of these drivers had the opportunity to look back and say, ‘When I factor everything in, there’s not so much money left, and maybe I need to do something else.’”
“I think no one is happy at this point. Customers are not happy, drivers are not happy, and Uber is not happy.”–Gad Allon
Is There a Better Way?
To be sure, Allon said, drivers will return, attracted by the higher fares and the flexibility afforded by gig work. However, he said Uber and similar firms will have to reexamine the diminishing returns of their employment model because those drivers have long memories and aren’t willing to dismiss how they’ve been treated in the past.
In the meantime, customers can do more than grumble about high prices and long wait times. Allon called on consumers to be good citizens by encouraging fairness through competition: Use more than one service to prevent a monopoly; push the government to offer its own gig options; and appeal to elected officials to regulate the platforms in ways that protect workers and customers.
“I think we’ll see a little bit of recalling from all sides here — from the drivers that are already doing that, the firms that are realizing that, and the consumers who realize which side of the economy they want to be on,” he said. “We cannot just be consumers. We are responsible for the health of all sides here in this market.”
This article was first published in Knowledge@Wharton
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