Four market structures are generally distinguished in theory: perfect competition, monopolistic competition, oligopoly, and monopoly. In perfect competition, all of the competing companies offer homogeneous products while consumers have perfect knowledge of all products and prices. The barriers to entry are low or nonexistent, which leads to price competition that ultimately leads all market members to set the same price. Monopolistic competition is similar, but the products are not perfectly replaceable, with the restaurant industry and its different menus and styles serving as an example. Price competition still takes place, but firms also try to differentiate their products from the rest. Under an oligopoly, a small number of firms producing mostly similar products dominate the market. None can achieve domination, and they are encouraged to work together, explicitly or otherwise, to retain their position. Lastly, in a monopoly, one firm holds a massive share of the market. As a result, it can take a large number of otherwise damaging actions, such as arbitrarily raising prices or stifling innovation.
The company that is evaluated in this paper is Uber, the ride-sharing giant. Its current market structure can be said to be oligopolistic, as a small number of businesses in the field, such as Uber itself, Lyft, and Bolt, hold a massive proportion of the overall market share. Based on Uber’s market cap and traffic relative to its competition, the case could be made that the company is a monopolist. However, both of these conclusions may be wrong due to the structure of the market in which Uber operates. As Cohan (2019) notes, the costs of entering the industry and of switching to another provider, both for drivers and for customers, is very low. Moreover, the services provided by the different businesses are effectively the same, with next to no differentiation. As such, the market may be rapidly moving toward a perfect competition model, especially considering that the large players are chronically non-profitable and may have to downsize or go bankrupt in the future.
As outlined, the currently low barriers to entry result in high competitive pressures that have a large effect on Uber. In a market with high entry barriers, they would be diminished because the company would not need to deal with as many newcomers. With that said, there are already numerous large businesses that compete with Uber in the industry, most notably Lyft. While Uber has a considerable advantage over them in terms of size and brand recognition, their ability to take a sizable portion of market share needs to be considered.
With high entry barriers, the ride-sharing industry would likely start moving toward becoming an oligopoly. Uber would take on a dominant position, counteracted by the other large ride-sharing businesses. Moreover, with the current pricing, all of these businesses would remain unprofitable (Cohan, 2019). As such, they would likely start setting their prices higher until they reached a point where they were profitable. Overall, barring another disruption such as that introduced by Uber into the taxi industry, high barriers to entry would likely make Uber profitable in the long term.
The ride-sharing market is characterized by a very high price elasticity of demand, which is the reason why Uber operates at unprofitable prices. Most locations where ride-sharing is widely available also have extensive public transportation systems that potential customers can use instead. Alternatively, customers may resort to services such as car-sharing or bicycle renting for shorter trips, considering the purchase of a car in some edge cases. Overall, ride-sharing is a convenience that people will only use as long as it is as cheap as possible, which prevents companies in the industry from raising prices.
Relative to its industry, Uber is not particularly helped or inhibited by the regulations currently in place. There is a discussion about whether its drivers are employees or independent contractors, but so far, the government agencies have ruled in favor of the latter (Cerullo, 2019). The declaration of the drivers as employees would entitle them to a variety of costly benefits that Uber does not currently provide. However, such a decision would also apply to the rest of the industry, and it already applies to traditional taxi services. Currently, this difference is a considerable part of the reason why Uber is dominating the older businesses and disrupting the landscape. Hence, the regulations benefit Uber and its industry, and any changes other than a potential antitrust investigation into the company would affect the whole rather than individual businesses.
Currently, the government is impeding Uber’s and other industry members’ ability to become by taking a laissez-faire approach to its regulation. This lack of involvement directly contributes to the low barrier of entry, as the necessary infrastructure is relatively inexpensive before scaling becomes a concern. By becoming more involved, the government could raise the regulatory costs of starting and operating such a business, raising the barriers. Then, the scenario discussed above may take place, with an oligopoly emerging and resulting in price increases. As such, the government can help the market become less competitive, leading to price growth as all of the current members take advantage.
Reference
Cerullo, M. (2019). Uber drivers are independent contractors, not employees, says National Labor Relations Board. CBS News. Web.
Cohan, P. (2019). Why Uber lacks a sustainable competitive advantage. Forbes. Web.
