A terrible tale of misaligned incentives

After going out last evening again to a massively over-saturated Boston market, I did some thinking on the alignment of incentives in the driver/Uber/rider relationships. What I discovered is that, probably not unsurprisingly, they're really not very well aligned at all.

To think about this, let's consider the business model. Uber makes money from riders, and pays money to drivers. Uber is thus incentivized to maximize income from rides, through more rides, more expensive rides, or some combination thereof.

Riders in this ecosystem have three main motivations: fast, cheap, and safe. To meet the fast and cheap desires, Uber is incentivized to have more drivers available on the road - to increase the likelihood that there's a driver nearby when you make a request, and to avoid surge pricing (or just delays) when demand outstrips supply.

Drivers, as you might expect, want to maximize their earnings per unit time. To do this, we generally want to be giving rides as much as possible - any downtime is time we're not earning money.

And this is where the problem comes in - the drivers' and riders' motivations directly conflict, and Uber in the middle thus has to decide how to address it. Because if they put a ton of drivers on the road, over-saturating the market, riders are happy because it's easy to get rides, but drivers are sad because they each get fewer rides. If Uber puts fewer drivers on the road, demand surpasses supply, and wait times and/or prices go up. Drivers are happy because they're busy and possibly making extra money with surge pricing, but riders are unhappy and will switch to a competitor.

But wait, you say, Uber doesn't get to tell you when to drive, you told us that a long time ago! You're absolutely right, Uber can't dictate drivers' hours, that would make the relationship one of an employer, not a contractor, and that would make them very sad. However, they do have nearly infinite power to manipulate the supply of drivers.

You see, there's more than just rides and their fees when you're an Uber driver. Uber also uses a system of rewards and incentives to manipulate the supply system. In particular, in the past few weeks they have been running a "peak hours" promotion in Boston, where drivers receive an incentive payment depending on the number of rides they give during "peak hours", as defined by Uber. It turns out this is a brilliant tactic, because it causes a rush of drivers to the roads during these hours, providing an optimal rider experience, but because there are so many drivers on the road, it's very difficult for them to actually accrue the rides they need to qualify for the incentive. But we all keep trying anyway - what suckers!

At the end of the day, it's clear to me that Uber cares more about the riders than the drivers. After all, the riders are the ones paying - that makes them the customer. To Uber, I think drivers are essentially a limitless resource - if someone switches over to Lyft, or just stops driving entirely, it doesn't materially hurt them - after all, if demand is too high they'll just kick in surge pricing. If a rider leaves, though, that's actual potential money they're not going to make, and that's a problem. So it's clear where we drivers sit in the hierarchy - at the bottom.

Time to sign up for Lyft and see if they're any better. Somehow, I doubt it. :)