The Essence of the Sharing Economy: Thinking Through Uber

2018/12/12

The "sharing economy" generally refers to services that use information and communication technology, such as smartphone apps, to match idle assets owned by individuals with others who need them, sharing (lending and borrowing) them for a fee. Idle assets include places, vehicles, goods, and people (skills). Representative examples include Airbnb for places and Uber for vehicles. Using ride-sharing, represented by Uber, as an example, I would like to consider what is being shared, the background behind the spread of ride-sharing, and its impact on the socio-economy.

First, let me briefly explain how to use Uber. Users download the free Uber app to their smartphones, enter their personal information in advance, and link it to a credit card. When a user enters a destination, the arrival time of candidate cars and the fare to the destination are displayed; once requested, an Uber arrives in a few minutes. Unlike cruising taxis, Uber not only eliminates frustrations such as being unable to catch a taxi or uncertainty regarding wait times, arrival times, and fares, but in many cases, it is also cheaper than taxi fares. Ride-sharing is welcomed by consumers as an affordable and convenient means of transportation, and it is also welcomed by drivers who own private cars and want to sell their spare time. It also has the potential to become an alternative to owning a private car. On the other hand, the taxi industry, which is losing customers, views it with hostility.

Car-sharing can also be called a form of sharing. However, the major difference from ride-sharing is that while the former involves sharing an individual's private car that is not normally in use, the latter also involves sharing driving services (skills and free time) to transport someone to a destination. Furthermore, in many cases of car-sharing, companies own the vehicles and provide the service commercially; in such cases, there is no essential difference from a rental car.

Unlike taxi companies, Uber is an intermediary service that provides a platform (app) to match drivers and users. Uber does not need to hire drivers and does not bear fixed costs such as vehicles or garages. From another perspective, for Uber, not only the users of the transportation service but also the drivers can be considered another set of customers. This is what economics calls a two-sided market, and Uber has the strength of being able to flexibly set prices that maximize the total profit for both drivers and users. When demand surges or supply is low, prices skyrocket.

Another characteristic is the network effect. In ride-sharing, it is necessary to match drivers and service users spatially and temporally; the more drivers and users there are in an area, the shorter the arrival time for users and the easier it is for drivers to find customers. In other words, if either the number of drivers or users increases, it results in direct or indirect benefits for other drivers and users. This is the network effect, which makes it easy for a specific company to become a sole winner. Competitors to Uber, such as Lyft, Grab, and DiDi, provide services in various parts of the world, and in places like the United States, multiple ride-sharing services compete.

However, the service Uber currently provides in Japan is merely a dispatch service for existing taxis and does not provide a "ride-sharing" service. This is because in Japan, except for some areas, paid transportation using private vehicles—so-called "shiro-taku" (unlicensed taxi) activity—is prohibited by the Road Transport Act. Uber as a ride-sharing service is only specially permitted in a very small number of depopulated areas as "paid passenger transport in areas where public transport is vacant." For this reason, Uber has had almost no impact on the Japanese taxi market.

The taxi market saw a re-strengthening of regulations following the deregulation in 2002. If an area is designated as having oversupply, new entry by taxi companies is prohibited, increasing the number of vehicles is virtually impossible, and significant fare reductions cannot be made. One of the grounds for regulation is safety, which is the most important quality of transportation services. While Uber drivers achieve a certain level of service through a review system, it is unclear whether they meet safety standards equivalent to those of taxis.

Another reason, though limited to cruising taxis, is that the price mechanism does not function. People use taxis because they want to move quickly, but they do not know how many minutes it will take for the next taxi to stop or if the fare will be cheap. Therefore, taxi companies have no reason to lower their prices. Thus, fares are regulated, but ironically, since ride-sharing allows users to choose after seeing the price, this cannot serve as a basis for regulating Uber.

If safety is ensured, lifting the ban on ride-sharing would realize cheaper transportation, encourage human interaction, and have a positive impact on local economies. At the same time, it can provide a sense of security for the rapidly increasing number of foreign tourists, allowing them to travel using apps they are accustomed to in their home countries. What ride-sharing may be revealing is a Japanese society where vested interests and slow administrative responses hinder technological innovation.