Uber as a Two-sided Market

By reducing information cost, the internet has ushered in many novel two-sided markets.

FedEx is a well-established logistics company employing 300,000 people delivering goods all over the world with 654 airplanes and 43,000 delivery vans (FedEx company statistics 2012). Uber, on the other hand, is a startup taxi-hailing company employing merely 2,000 people with few company-owned vehicles. Yet its premarket value is worth some 80% of FedEx (WSJ 3/8/2015). If Uber is also considered as a logistics company that moves people around, where is its transportation infrastructure?

But Uber is not a conventional logistics company. It is just a two-sided market maker. which provides a cost-saving platform (a mobile app) to match car owners with surplus carrying capacity with customers who need to go places not well served by public transportation or conventional taxis (Evans). Its job is not so much employing drivers and possessing vehicles but revealing the potential of already existing transportation infrastructure (WSJ 3/8/2015) and latent demand for rides (Economist).

Like any other two-sided market makers, Uber enlarges the network by subsidizing one side of the market and charging the other side the full price (Rochet and Tirole). Specifically, car owners pay nothing to register and switch on their availability on the Uber mobile app. In return, they are rewarded by dynamically priced fares paid by ride hailers based on real-time supply and demand conditions. Viewed this way, Uber is no different than the Google search engine and print newspapers. They differ only in the physical manifestation of the market platforms. In the case of Google, the market platform is the search engine. In the case of print newspapers, the market platform is the print media. The search engine and the newspaper both serve to bring the advertisers (who pay full cost) and the searchers/readers (who pay nothing or very little) together.

Because of this distinct pricing structure, the market platform of two-sided markets may appear to be a public good to one side of the market but a private good to the other side. For example, search engines are public goods to searchers because there is little consumption rivalry and excludability in the accessing the information database, but the advertising spaces are private goods to advertisers with consumption rivalry and excludability for choice placements.

Charging different access prices to the two-sided platform is pivotal to building up a dense transaction network where the value derived by each side increases with the size of the other side after a critical mass is achieved. The side that is more price sensitive and can provide network growth to the other side gets subsidized. For example, Adobe Reader is free to viewers of PDF file while publishers of PDF files pay dearly for Adobe Acrobat. On the other hand, the side that adds platform value and thus pricing power gets subsidized. For example, software developers for an operating system get subsidized while adopters of the operating system and its applications pay the bill. The market maker must carefully trade off between increasing network size and increasing pricing power (Wikipedia).

By reducing the transaction costs of bringing buyers and sellers together, the internet has thus ushered in the emergence of novel two-sided markets such as Uber, AirBnB, and Roadie. The potentials for exchanges between surplus capacity and pent-up demand have always been there, the reduction of information costs finally makes it profitable for the market makers to consummate the transactions. In a sense, the so-called new sharing economy is nothing but an old-fashioned two-sided market on internet steroid.