Uber, Lyft, and Lessons on the Market for Megan McArdle

August 24, 2020

Washington Post columnist Megan McArdle had a piece today arguing that California is taking a big risk if it insists on requiring that Uber and Lyft treat their drivers as employees. The risk is that these companies have threatened to shut down their operations in the state, leaving their drivers out of jobs (actually Uber and Lyft insist they already don’t have jobs). According to McArdle, people then won’t be able to get rides, and restaurants will no longer have access to delivery services. And this comes when the state is suffering through a horrible recession.

While that sounds really bad, fans of the market will be less troubled.  There are actually many cab companies in California that compete with Uber and Lyft. (I’m not sure if they are complying with the state’s law on driver classification.) If Uber and Lyft leave the state, presumably these companies will largely fill the gap. There may also be some new startups who will enter to fill the vacuum.

Since there are not many economies of scale in driving cabs, the reduction in Uber and Lyft rides will be largely offset by an increase in rides by these other companies. They will then need more drivers, which should mean that positions will open up at these companies for the former Uber and Lyft drivers who want to take them.

There may be some drop off in demand, since both Uber and Lyft have been losing money, meaning that investors are effectively subsidizing their passengers’ rides. Profit-making cab companies may charge a higher price and therefore have somewhat less business, but the lost business will be far less than Uber and Lyft’s current business.

It is also worth noting that, while investors may not in general be very smart, they typically hold stock because they expect the company to be profitable, not just because the company is cool.  At some point, Uber and Lyft will presumably raise their prices so that they actually make money. 

The same story applies to restaurants and their delivery services. Many restaurants offer their own delivery service and there are other companies that do pick-ups and deliveries from restaurants. In short, California’s restaurants will not have to worry about not being able to get their food to customers if Uber and Lyft leave the state.

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