Competition of on-demand mobility services can lead to a two-fold dilemma in case Transportation Service Providers (TSPs) try to displace each other instead of cooperating:
- Oversupply through Density Inflation
- Multiplication of Oversupply
Oversupply through Density Inflation
Mobility customers tend to flock to the next available option. In case multiple TSPs compete, the TSPs who is next will win. This leads to an inflation of customer expectations: when it was acceptable that it took 10 minutes to wait for a taxi in the past, now customer expect the next Uber or Ola to arrive in no more than 3 minutes. This leads to so called “harmful roaming”, i.e. drivers circling in high demand areas fueled by “surge pricing”. Congestion or even gridlock can be the result, as the Schaller study and other research unveil. Same with kick scooters. If your competitor covers every 2nd corner, you win if your fleet covers every single corner. This effect alone leads to an unsustainable oversupply of each supplier alone.
Multiplication of Oversupply
The inflation effect alone leads to oversupply, which nobody really needs nor can it be profitable. But it gets a lot worse in case ride hailing driver do not driver for all taxi-like services at once – but only for one of them. In this case Uber would try to reach maximum density as well as Ola as well as taxi companies – each of them adding another layer of oversupply – multiplying the already too high number of vehicles on the street.
Do you think this does not happen in reality? Have a look at this screenshot from the aggregator app Free2Move from the same area.
What Could Help?
Is anyone still surprised that cities are congested and scooters pile up where on-demand providers compete? Not to mention the negative impact on air quality and climate. A pretty clear case of market failure.
Both effects can only be avoided if there is no competition on the availability for the next car, bike, scooter or whatever vehicle is wanted. That smells like a need for regulation. Phew! The bad “R” word. Seriously? Should we go back to the dark times of rare and shabby taxis with rude drivers ripping us off? Nope!
Obviously there is a need for regulation and cities will apply it sooner or later. But smart cities could still allow for competition between the TSPs – just not on availability.
When it comes to vehicle density, TSPs need to complement each other instead of displacing each other. This would reduce congestion, emissions and also costs for the TSPs while still maintaining a healthy availability – so a clear win-win for all. But how should this work in a hyper competition of venture capital-powered start-ups? Competition needs to happen on another level.
Regulation Gone Wrong
Municipalities could regulate availability by allowing only one TSP to cover certain areas of the city. If only one TSP covers an area with their own vehicles, there is low to now incentive to react on changes in demand needs. Quite the opposite: in order to reduce costs, TSPs will optimize their car utilization and so have a systematic tendency for undersupply.
Roaming Leads to Platform Competition
Another way to avoid the availability dilemma would be to make roaming mandatory, i.e. making every vehicle available for every TSP. This would still give TSPs an incentive to flexibly follow the demand as they would still make money with each ride – even the customer might have it ordered via a competitor’s platform. Competition will then likely happen on the platform level, i.e. who provides the best platform with the best curated mobility services in combination with good customer support and quality management. I’ll come to that topic in my next blog post about mobility service roaming.