Abstract
Monopoly organizations refer to firms that are the sole service providers and act as a barrier to new entry, enabling them to control the pricing. Usually, monopolies are blamed for causing inequalities and lack of competition, but they remain desirable for entrepreneurs. At its conception, Uber had the goal of becoming a monopoly in online taxi-sharing business. However, the company failed to sustain its strategy as other companies were able to replicate and join in the fight for market share. Several factors have been attributed to the failure, including the inability to secure customer loyalty, replicable business strategy, high maintenance cost, changing economies, poor management, and increased government regulations for taxi drivers. However, the primary problem is that Uber failed to understand the conditions necessary to remain a monopoly. Thus, despite the plans for achieving sustainability, such as differentiation, it is impossible to achieve its monopolistic endeavors, and may have to work harder to remain afloat.
Introduction
Economists continue to warn governments of the dangers of monopoly corporations which are characterized by being sole sellers without close substitutes. Their negative impact include slow growth and inequality as start-up enterprises cannot compete with those that enjoy high economies of scale (Tepper, 2018). Monopolistic capitalism is predatory when successfully established, as it only benefits a few while killing healthy rivalry in the market. Uber is one of the enterprises that endeavored to become a dominant taxi service provider. However, its vision failed because its business strategy was easily copied by other emerging firms making it impossible to dictate prices. Worse still, taxi regulators and, constant fluctuations of fuel price, boycotts from the taxi owners makes sustainability of Uber challenging. In their respective articles, DeBord (2017), Sargen (2022), and Schwartz (2022) discuss reasons for Uber’s failure in its monopolistic endeavor. Although some economists believe that Uber’s management is to blame for its ever-deteriorating revenues, the truth is that the monopolistic quest has failed, and it was the only bet for remaining afloat.
Literature Review
Monopolies thrive where they have many loyal customers, and the next best competitor is far behind in terms of revenue and size. However, according to DeBord (2017), the massive market share that Uber currently enjoys is volatile. The observation is evident from the analysis that in 2022, Uber’s profit margin dropped by 40% and 57% from its best performance (Schwartz, 2022, para.7). Low revenue can partly be explained by the impact of the COVID 19 pandemic, which derailed the transport sector. However, Sargen (2022) explains that even the taxi drivers are unwilling to resume their former job because of the low wages. Yet, Uber continues to struggle to attract more clients even after internationalization to many countries.
Despite having a great business plan, Uber’s idea of becoming the only ridesharing platform has failed. The number of people using rideshare services increased from 8% to 46% in 2016, indicating that it is smart approach (Sargen, 2022, para.8). The challenge is that the strategy has not eliminated rivals in the industry which have replicated their design (DeBord, 2017). Moreover, the changing economic times have made it difficult for Uber to rely on cheap capital for research and development (Schwartz, 2022). There is a shift characterized by rising interest rates which makes the value of positive cash flows more relevant than growth. The implication is that even if cab sharing may stimulate progress, it is not enough to ensure sustainability within the current market.
Consumer power is often low in monopolies which are not reflected in Uber’s current financial strategy. In the contemporary world, most customers care about minor aspects, such as if their ride will arrive within five minutes (DeBord, 2017). Yet Sargen (2022, para.2) writes that he recently had to wait for 30 minutes for an Uber cab at a “cost $50-$60 before tip.” Such a delay can be an indication that there are few drivers on the Uber Application. The other observation in regard to client behavior is that they tend to pick on taxis that offer the lowest prices (Schwartz, 2022). Moreover, taxi regulations have ensured that there is a flat rate for all riders based on the distance covered (Sargen, 2022). There are even applications that customers can download and install on their smartphones so they can verify the prices. The combination of these factors gives consumers high power because they have a lot of information and options to choose from. Thus, Uber has lost control over the customers and may continue losing some loyal clients unless they discover a unique differentiation strategy.
Uber’s strategy to remain dominant is unsustainable because disastrously expensive. For instance, the company has to figure out how it can stop losing about $1billion quarter annually (DeBord, 2017). The suggestion given is for Uber to start having pricing power by “making users pay more” (DeBord, 2017, para.13). In other words, Uber should start determining its prices at the company level without consideration to the charges that competitors are making. Notably, according to Sargen (2022), Uber is already charging a higher price compared to individual taxis. However, even if Uber manages to secure monopolistic pricing, governments may create more aggressive wage and price controls (Sargen, 2022). Thus, the regulatory risk makes it difficult for the company to decide on its charges and achieve differentiation.
Discussion
A key characteristic of monopolies is that they have absolute market power such that they can decide on the prices of their products. At the time that Uber started the business, it enjoyed being a monopoly for a short duration but failed to sustain the strategy. Noteworthy, the primary reason for the rise and existence of a monopoly is preventing new entries (Tepper, 2018). However, Uber has not been able to prevent new entries from joining the market. Some of the notable competitors in taxi driving with online applications for booking include Lyft and Dash, both of which are now trying to get the most from the market share (Schwartz, 2022). Uber has to share its market with its major rivals, which requires lowering prices since the consumers have higher bargaining power.
There are specific conditions that make it possible for monopoly corporations to exist and remain sustainable. For instance, it can happen when only one company has the necessary raw materials needed to run the business. In the case of Uber, the main thing is drivers willing to earn a living using their car. The implication is that it is not a complex enterprise to set up, and the key resources are easily available. In some cases, monopolies emerge when the government gives exclusive rights to a single company. With Uber, the government has been making regulations that mostly favor the consumer while making it hard for a single enterprise to thrive (Sargen, 2022). There are restrictions on prices per distance and implications for charging fares depending on the customer. Therefore, Uber cannot achieve a monopolistic strategy by relying on government.
The only business approach that may have worked if Uber adopted from the start is becoming a natural monopoly. As explained by Tepper (2018), this is where one firm sufficiently cater to the market demand at a cheaper cost compared to when multiple enterprises provide the same service. When Uber started, it tried attracting many riders to join their platform, which would have enabled the company to have enough service providers for its population. However, most of the taxis are now opting to work alone rather than work on company platforms (Sargen, 2022). Moreover, many taxi drivers are unwilling to continue working in the industry due to low-profit margins. Thus, Uber cannot satisfy the market demand alone and at an economical cost.
Price discrimination is sometimes used by monopolies where they charge differently depending on the customer for the same service or product. Uber can possibly adopt this strategy to maximize its profit margin by placing high prices in affluent neighborhoods or remote areas. The challenge is that the government regulations on pricing make it hard to adopt the strategy without clashing with the low. Furthermore, there is a high chance that not many customers would be willing to pay higher prices.
The minimax game theory can provide insights into Uber’s next move in case the failure of its being a monopoly causes significant losses. According to the model, the firm can make decisions that will make it to either maximize the least revenue or minimize the highest loss (Tepper, 2018). In other words, the company should strategize on ways to ensure that even with competition, it is still able to make a profit. For instance, DeBord (2017) suggests that the management should change because it is using more money, which makes the company unsustainable. In addition, the company can use cost leadership differentiation strategy to gain more profit from premium customers.
Conclusion
Uber started well, but its strategy has failed to withstand the rigor of economic changes, government regulations, and the pandemic. The company, which was once a monopoly, now competes with many entrants causing the consumers to have higher bargaining power. Moreover, in the transport sector, the COVID-19 pandemic had a negative impact on its sustainability. The regulations and sanctions by the government are worsening the business. Therefore, as implied in the minimax game theory, Uber should now focus on maximizing its profits while reducing the risk. Otherwise, it is impossible for it to become a monopoly because the market will continue to be more competitive.
References
DeBord, M. (2017). Uber wanted to be a monopoly — But it may have to settle for the next best thing. Business Insider.
Sargen, N. (2022). Having trouble hailing cabs while uber/lyft prices surge? time to fix regulations. Forbes.
Schwartz, H. (2022). Uber stock: A ride-sharing monopoly may not save it. Seeking Alpha.
Tepper, J. (2018). The myth of capitalism: Monopolies and the death of competition. John Wiley & Sons.