Uber and Lyft: A Textbook Case of Duopoly?
When my friend insisted that using Lyft costs less than taking an Uber, I was genuinely surprised. To most people, Uber almost equals Lyft. As the two biggest ride-sharing companies in the US, Uber and Lyft have slowly become interchangeable terms. Even though these two companies provide similar services, they differ in the financial strategies they employ to overpower each other.
It’s clear that Uber and Lyft are the leading companies in the American ride-sharing market, as they own nearly 98% of it. Thus, showcasing a classic example of a duopoly. In this scenario, two suppliers dominate the market for a commodity or service. In a duopoly battle, companies compete against each other through price and quantity manipulation. Additionally, they may either practice a simultaneous or a sequential game strategy. In economics, there are four different types of duopolies that depend on the price, quantity and game theory: price-setting, simultaneous game Bertrand Duopoly (price-setting,cooperative, simultaneous); Edgeworth Duopoly (price-setting, sequential game); Cournot Duopoly (quantity-setting, simultaneous game); Stackelberg Duopoly (quantity-setting, sequential game).
Facing the same market and demand, Uber and Lyft engage in sequential price-setting competition and the game of brand differentiation (“ to set your brand apart from the competition, by associating a superior performing aspect of your brand with multiple customer benefits”). Sequential price-setting refers to firms mimicking each other’s price alterations. An example of sequential price-setting is when Firm 2 cuts prices after Firm 1 decreased its prices.
First, let us take a closer look at the Uber and Lyft fares. Uber and Lyft charge pretty much the same price on average. “Both companies charge around $1.00 to start a ride and then charge $1.50 per mile, around .25 cents per minute.” However, the two companies have different fares for rush hours. Logically, ride fares for rush hours are more expensive because the high demand for rides pushes the prices higher. Uber calls it Surge, and Lyft calls it Prime Time. Based on the location, Uber surge prices are “up to 17r 2.1x to the base, time, and distance fare.” On the other hand, Lyft “charges the extra fee in the form of a percentage that gets added to the base ride amount.” In other words, Uber multiplies their regular prices by a certain amount while Lyft adds a certain charge to the usual costs.
In terms of price competition, Uber and Lyft resemble a case of quantity-setting, sequential game. Uber has stronger financial support than Lyft, so Uber can afford to cut prices harder. Uber’s major investors include “engine giants Google Ventures and Baidu (mainland China’s biggest search engine),” and it also has Carnegie Mellon University as a technology partner. Therefore, Lyft is pressured to cut prices as Uber does so. If the two companies continue cutting prices, the situation would be good for the consumers, but detrimental to the drivers.
In the Uber and Lyft tug of war for market share, Uber currently holds a significantly larger market share of 69.2%. “Lyft is the smaller of the two companies, operating in 65 cities in the United States only, while Uber covers 250 cities worldwide.” Nevertheless, these two companies have moved their battlefield to the stock market. Lyft has quickly absorbed more shares partially due to their financial strategies. Following Lyft, Uber also “filed confidentially with the Securities and Exchange Commission for an initial public offering.” Lyft tried to go public before Uber so that it could market itself better and win the first wave of investments. The competition between Uber and Lyft involves advanced financial strategies, technology and product development, such as UberEats.
By looking at the duopoly in the ride-hailing industry, we are putting a microscope on a real-life example of game theory. With the knowledge of how duopoly works, you know that choosing Lyft during rush hours might save you some money.
Edited by Naomi Santiago and Ethan Kim.
Sources:
Carter Lorraine Dec 9. 2014 Brand Differentiation: 30 Ways to Differentiate Your Brand Persona Design
Ridester Staff. Jan. 22. 2019 Uber vs Lyft: A Comprehensive Comparison. Ridester
Iqubal Mansoor, Nov. 28, 2018, Uber Revenue and Usage Statistics (2018), Business Apps.
Shell Adam, Dec.09.2018, Uber starts IPO process in confidential filing that creates race with rival Lyft, report, USA Today.
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