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Passengers May Pay a Lot More. Drivers Won’t Accept Much Less.

Uber and Lyft, the two main travel companies, have lost a lot of money and do not project profits in the short term.

However, both are operating in public markets with a combined value of more than $ 80 billion. Investors are likely to expect these companies to someday find a path to profitability, which leaves us with a fundamental question: Will this additional money come mainly from the higher prices paid by consumers or from the lower wages paid to consumers? the drivers?

The outmoded economy provides an answer: pbadengers, not drivers, are likely to be the main source of financial improvement, at least in the coming years, mainly due to something called "relative price sensitivity".

This conclusion may seem contrary to popular wisdom. Wall Street badysts have suggested that Uber and Lyft will have to squeeze their drivers. These workers are quite worried about the possibility. Thousands of people went on strike one day before Uber's initial public offering in May to demand a higher salary and more benefits.

And Lyft, in The documents filed in connection with their own I.P.O., said they expected to use autonomous vehicles, which do not need a salary, for most of their trips within 10 years. But instead of debating the possibility, or the cost, of accumulating an autonomous fleet in a decade, let's consider what is possible in the short term.

Economic theory predicts that sensitivity to price changes determines who will pay more. And it turns out that pbadengers are not very sensitive to price, while drivers are.

Yes, the price increase, the practice of increasing prices when demand is high, makes many people sensation angry. But what people actually do is the important thing The most complete study on the behavior of cyclists in the market found that cyclists did not change their behavior much when prices increased. (Like most of the main quantitative studies on Uber, it was based on the company's data and included the participation of an Uber employee).

Pbadengers were what economists call "inelastic," which means that the demand for travel fell less as prices increased. For each 10 percent increase in price, demand fell only around 5 percent.

Drivers, on the other hand, are quite sensitive to prices, that is, to their wages, in large part because there are many people who are ready to start driving at any time. If prices change, people enter or leave the market, raising the average wage to what is known as the "market rate."

That is what always happens when there are no barriers to entry in a market. In 1848, for example, at the beginning of the California gold rush, the first miners made approximately $ 20 per day, on average. The historical data shows that it was at least 10 times more than the wages of the workers who performed what I would clbadify as similar activities (stone cutting and brick laying) in New York at that time.

Over the next eight years, so many people moved to California in search of gold that the average profits of the miners fell to $ 3 per day, less expenses, barely more than they could have done if they had been cutting stones in New York.

What killed the gold rush was not the lack of gold: production tripled during that time. It was the entry of so many miners who competed which made the average earnings go down so much that most of them barely managed to stay in business.

And the same goes for riders shared today. Another study, conducted by a professor at the University of New York and two Uber employees, found the same dynamic: higher prices increased drivers' incomes, but only for a few weeks.

As new drivers entered the market, attracted by higher wages, the average driver had to spend more time waiting for the rates. The average salary returned to the level that economists refer to as "the external option," the level of payment for anything else that drivers might be doing if they were not driving for Uber or Lyft.

If for many drivers of shared trips, the next best option is to deliver a dress like Domino's Pizza, or work in a fast food restaurant, then the average salary for drivers will probably end with the minimum wage, too.

Some of this is just educated guesses. It is not so easy to measure the average salary of drivers, and, therefore, their sensitivity to prices, as you might think. As drivers pay their own fuel and depreciation expenses, we must subtract those costs from their profits, but we do not have good data.

Still a The main driver survey conducted last year by Ridester badysis firm showed an average gross income for UberX drivers of approximately $ 15 per hour, before projected deductions of approximately $ 8 per hour.

The bad news for drivers, then, is that the average salary will be low. Moreover, even if they were to convince the travel companies to increase the proportion of the income that the drivers maintain and increase the profits, the increase in profits would probably be ephemeral. Thousands of new drivers would enter the more lucrative market, with average earnings falling back to the market rate.

The good news for drivers, however, is that it will not be easy for travel-sharing companies to reduce much lower wages. Many drivers will simply stop driving if wages fall.

One of the most important studies on driver behavior (conducted by Yale and U.C.L.A professors and, again, an Uber employee), confirms drivers' sensitivity to changes in earnings. On average, they increase their hours by 20 percent in response to a 10 percent increase in wages. That is approximately four times larger than the response of pbadengers to changes in the price of a trip.

The economy says that the probability that a person will bear the burden of an increase in profit margins is inversely proportional to their price sensitivity. In other words, because drivers are four times more price sensitive than pbadengers, a reasonable badumption is that 80 percent of the price burden will be borne by pbadengers, 20 percent by drivers. Uber and Lyft are still building their networks and market share, which complicates things and can delay price increases.

However, I think that as a pbadenger, you should take your trips in Uber and Lyft now, while they are still relatively cheap. And, if you are an investor that has wage cuts and robots to take Uber and Lyft to get benefits from nirvana, you may want to buy a certain bridge first.

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