Ride-Sharing Monopoly

In business school we did a case on eBay that was teed up perfectly for the professors to disabuse students of a cherished notion.

The central question was what makes eBay such a successful marketplace? And the intuitive answer is “network effects”. The more people are using eBay, the more the next user wants to join eBay, instead of a competitor.

And the professors loved this answer because it is so easy to pop a hole in it.

Buyers don’t want to be with other buyers — the competition just drives up prices. And sellers don’t want to be with other sellers — the competition just drives down prices.

Instead, the professors argued, it was eBay’s reputation metrics that really drove its success. Buyers and sellers want to transact with counterparties that have solid reputations, and only eBay can provide that.

This is a good and correct answer, but it’s always seemed incomplete to me. eBay has a couple of other strengths:

  1. eBay has a thick market. There is no other market where you can find the Danish Christmas ornament from exactly 28 years ago that you just shattered and need to replace.
  2. eBay has an incredible brand.

The point about branding is especially easy to ignore, in business school and elsewhere, because it is so close to magic. How do you build a good brand? How do you know if you have one? How do you know if one brand is stronger than another brand? How do you quantify when a brand is strong enough to support a monopoly?

Warren Buffett was a famously late in life convert to the power of branding, in all its mystery.

Which brings us to ride-sharing and Uber.

Uber, like eBay, has power in its reputation metrics, in the thickness of its market, and in its brand.

So how do these stack up to eBay?

  1. Uber’s reputation metrics are less important than eBay’s. Uber’s ride-sharing flow is simpler than eBay’s asynchronous process of buying, and paying, and shipping, and receiving, so counterparty reputation matters less.
  2. Uber’s market thickness is more important than eBay’s. If an Uber driver or rider can’t find a match at any given moment, they’re much more likely to give up on the service altogether, than if an eBay buyer or seller can’t find a match.
  3. Uber’s brand is as important as eBay’s. But Uber hasn’t locked up the market yet. Lyft is on their heels. The question is, unlike with online auctions, is there room for two players?

One last note is that while eBay does not have a direct competitor, Craigslist serves as an alternative, albeit a distinct one.

Lyft is much more of a direct competitor to Uber than Craigslist is to eBay, but the existence of Craigslist raises the possibility that two firms could survive in the market.

H/T to Jared Myer and Daniel Pryor’s post in Forbes, which inspired this.

Originally published at www.davidincalifornia.com on February 16, 2016.

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