Predatory pricing is when you charge less for a product than it costs to produce. The idea is to grab market share and drive competitors into bankruptcy, then raise prices, ideally once there is a lot less competition.
Possibly related??? Uber lost 1.2 billion dollars this year https://t.co/5hhG2Q7DR5
— Donte Jawncrief (@OhWowHmm) August 27, 2016
Flat rate taxi fare from Charlotte airport: $25.
Uber fare back to the airport: $11.44.
Competition is a good thing.
— Ben Volin (@BenVolin) August 27, 2016
This certainly looks like predatory pricing. It is true that Uber has startup costs, and that businesses tend to lose money in the beginning, but it is widely reported that Uber’s prices don’t match its costs, mostly because it has to pay drivers.
Uber’s preferred endgame is to get rid of drivers and go to driverless cars, but there’s no reason everyone else can’t do the same once the tech is available.
In effect, Uber is burning capital to seize market share, not caring if it loses money. This is the same as what Amazon did: They lost money for years and years knowing that eventually it would control so much of the market that it would eventually recoup those losses.
The whole internet economy, as epitomized by app stores, Amazon, Uber, Lyft, and so on is about oligopolies which border on monopolies. It doesn’t matter if a million people produce goods or services, if most people go to only one or two gatekeepers to get those services, those gatekeepers have immense power. Once established, they can make immense profits.
The usual response is, “If they charge too much, new competitors will arise.” This isn’t entirely true, but it understates the difficulty of creating more competition. The capital was there for Uber and Lyft and Amazon, but it will not be there for a competitor with a similiar business model in ten years because by then, “We’ll charge less” won’t fly. The “new guys” won’t have economy of scale and they can’t expect to win a price war.
There is a reason the old “Big 3” car companies (GM, Ford, and Chevy) were never faced with domestic competition: Any viable competitor needed a largely protected foreign market in order to go scale before they could compete directly (and yes, the Japanese market was essentially a protected one).
Capitalism only provides the benefits it is supposed to when there are competitive markets. These internet gatekeepers and oligopolies are not competitive markets.
The best antidote for Lyft and Uber, right now, would probably be a low-overhead drivers co-operative with similar software. But without billions of capital to blow through, such an organization would have trouble even if its actual costs were lower. Competition would only work if the government stepped in. After Austin insisted Lyft and Uber fingerprint their drivers, competitors sprang up. That wouldn’t have happened while they were in Austin.
Note that what Uber and Lyft are engaged in is not just predatory pricing, it is regulatory arbitrage. “We will not obey the same laws and regulations as our competitors, the taxi companies.”
This is effectively identical to what AirBnB does: Renters on that site do not obey the same laws and do not have the same costs that hotels do.
Regulatory arbitrage.
Now, one can certainly say that taxis are overpriced, while also saying that what Uber and Lyft are doing is as much anti-competitive as competitive. One can say that many laws are unreasonable, and even argue that many laws are designed to keep out competitors and are thus themselves anti-competitive.
This can’t and shouldn’t be taken as a pure “Uber and Lyft and AirBnB” are bad situation; but the end goal should be to keep markets competitive, not replace one protected market with an oligopoly.
Competitive markets are NOT markets in which the government doesn’t interfere. They are markets which the government keeps competitive by making sure things like predatory pricing don’t happen by pro-actively breaking up oligopolies and monopolies, and where it does not create regulations so onerous that new entries cannot get started.
The “new economy” benefited immensely from anti-trust actions of the past.
There would be NO Microsoft as we know it, for example, if IBM had not used MS-DOS, and Microsoft only did so because the DoJ was on its case about anti-trust violations. MS-DOS was nothing special, nothing IBM engineers couldn’t have made themselves (and likely made better).
The problem is that the DOJ didn’t break up Microsoft when it started acting as a monopoly (they were almost certainly going to, but Bush Jr. stopped the court case in 2001 when he took office.)
You get the benefits of capitalism only when government, acting on behalf of the people, both makes sure competitive markets exist and when it intervenes to take the edges off other outcomes baked into standard market behaviour like rent-seeking, colluding to keep wages down, pushing for less than full employment, buying the government, and so on.
Markets are wonderful things, but like all great powers, they do untold damage if not forced to serve humanity rather than rule it.
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Everythings Jake
How do you protect against a failure of ethics, because those who fail in that regard will always seem to win (Gresham’s Dynamic)?
bruce wilder
They really ought to teach us that few “markets” per se exist. Price isn’t being formed by bidding in a marketplace. There’s no broker or auctioneer. Price does not reflect marginal cost.
Neoclassical economics is a great rhetorical engine. If you understand the logic of the market economy narrative, you can spin out an analysis and a rant, as you have done here, quite quickly and easily, while not actually having to ascertain much in the way of facts. Economics is very economical in that way.
But, you are still veal in a pen. Trapped by the framework of analysis.
The actual economy is organized around bureaucratic hierarchies. You’ve named several in your headline, but then the body of your text goes on and on about something else, something mythical that carries with it a lot of ungrounded presumption about the mechanisms at work.
Neoclassical economics began in an intellectual upheaval sometimes called, The Marginal Revolution. They focused on the importance of marginal cost and the allocation of resources by impersonal markets via the mechanism of price, while the actual economy developed into vast hierarchies, public and private, relentlessly focused on technical efficiency and the political power to earn (inframarginal) economic rents.
It is surprisingly useful as reactionary rhetoric, irrelevance.
But, it rarely works for progressive purposes.
different clue
Uber is also tricking every Uber driver to burn their own personal capital as well . . . the physical capital embodied in the cars which they are driving. They don’t get paid enough to repair the wear and tear they put on their cars with all the driving they do for Uber, so they have to either consume their car-embodied physical capital by driving it to death before its time, or they have to consume their money-embedded capital derived from sources other than driving for Uber.
I suspect Uber to be conceived of in the first instance as a scam and a racket. The scam is to fake the convincing appearance of a hip, cool, groovy disruptive new business model. The racket is to sell stock to rubes, and when the rubes have bought all the stock which Mr. Uber thinks he can sell, he will let the whole house of toilet paper collapse and walk away with the real money he got from selling scamracket stock.
And if he sees himself getting so lucky as to actually have a Uber vehicle able to transition to the future of driverless ubercars such that he can make more money that way than he would have by sticking to the original scam racket plan, then he could always do that instead.
Whatever . . . . anyone who rides in a Ubercar or buys Uber stock deserves whatever happens to them. The Uber drivers and the helpless 401k-plan captives who can do nothing about their planmasters buying Uber stock for their 401ks deserve better of course, but there is little they can do. The Uber drivers could wake up to the scam racket nature of Uber and just quit driving for it. The 401k captives have no such power except to cancel and cash out their 401ks, take the tax hit, and invest the money in doomerist survivalist prepperism. That is a step-too-far for most people.
Hugh
Free markets, competitive markets? As I have written for years now, the only questions you need to ask about markets is: who controls them and for whose benefit. The short answer to both parts is not us.
Uber, etc. are underpricing for market share. The lack of profit is a dead giveaway, but they are also underpricing by breaking the law, paying their “employees” shit, and converting major parts of their business into externalities, which they then dump on these employees.
All of this comes back to what kind of a society do you want to live in? One run by and for corporations or one run for you.
LP Stevenson
Chevy was (and is) part of GM. The other Big 3 company was Chrysler.
XFR
The “regulatory arbitrage” is basically the endgame of the Empire. One set of laws for a small cadre of well-connected American billionaires, another for everyone else on Earth. If you’re an outsider and try to play by the same rules that the elect few do, the entire weight of the system will fall down on you, irrespective of how rich or powerful you think you are. (cf Kim Dotcom)
This system was already there in embryonic form under Clinton, though at that point it was regarded as some kind of anomaly rather than a new order of things. Opposition was coming to a head when Bush II came on the scene and brought down the whip, affirming that no resistance would be tolerated from any quarter.
(This was followed shortly thereafter by the appearance of the first set of “arbitrage”-based concerns–Youtube etc. I sometimes wonder if the push for the “anarchic” TCP/IP internet and the abandonment of the commercial X.25 packet system might have been motivated largely by the desire to do an end-run around the local authorities who exercised jurisdiction over the latter, in a sort of reprise of how the myth of the open frontier was used to sell the dispossession of native Americans of their land holdings.)
The press are almost completely in the tank for the system, their reaction to anyone going against it, be they in business or in government, is mostly bemused snickering, though government officials in the U.S., particularly if they hail from the “red” parts, can sometimes get a fairer hearing.
Guest
Typo: “Microsoft only did so” should probably be ” IBM only did so”
different clue
@XFR,
If you are a foreigner, take heart. Your billionaires get to play by the very same Special Billionaires Rules that our American Billionaires get to play by. Does that make you feel better?
XFR
XFR
Yeah, I’ve heard that sales pitch a hundred times. It’s b*llocks. Like I said, just ask Kim Dotcom.
.
different clue
@XFR,
“Bollocks”? “Bollocks” sounds like some kind of foreign word. So I am guessing you are some kind of foreigner. I suspect your billionaires are just as much a part of the International Free Trade Conspiracy as ours are. I suspect your billionaires support TTP, TTIP, TISA, etc. just as much as ours do. And I suspect your billionaires will be just as heartbroken if they fail to pass as ours were.
Unless you think you have a kinder gentler breed of billionaire. And who knows, you may be right to think so. Time will tell, I guess.
Steeleweed
Disclaimer:
I’ve been in the PC world before IBM & Microsoft got there. I also worked for IBM in the frantic ’60s as well as a software house specializing in IBM mainframes and with NYSE, brokerages and banks and numerous major corporations. I’ve been a mainframe maven 1966-2013 and most of that time widely recognized on one of the top experts in the world on mainframes.
Re DOS in particular and IBM in general.
When IBM brought out the PC, they were looking for software. Bill Gates’ mother was on the board of a charity along with an IBM exec (CEO?) and mentioned her son’s interests. Gates was not initially interested – until he found he could simply use CP/M as a basis for an OS (and the difference between DOS V1 and CP/M was trivial). The IBM/MS partnership continued until IBM proposed OS/2 as the ‘next generation’ and MS went with Window NT. (Still have a copy of OS/2 Warp in the shrinkwrap). IBM also likes and uses Token Ring as well as Ethernet. TR is much more efficient, although I don’t know if it would scale to WWW levels, at least without a lot more hardware. It is used by IBM both with internal networks and as firmware in some hardware.
IBM’s Anti-Trust battles over the years significantly altered their business model. I recall that they priced the 1401 based on expectations of selling about 3000 of them. At that rate, they recovered their development, programming and tooling investments and made a respectable profit. They actually sold around 9000 of them and could have dropped the price significantly on the last 6000, since most of the cost had already been recovered. The 1401 had strong competition from Honeywell & NCR at the time but IBM was afraid that dropping prices would be deemed anti-competitive. They charged full price and laughed all the way to the bank. I have personally seen and participated in several sales situations in which IBM was scrupulously ethical – and some in which their ethics were ‘situational’ (to say the least).
I have found that the most efficient corporation, giving the best products and services is usually a monopoly that’s running scared of the Trust Busters. The breakup of ATT, for example may have given more choices and lower prices, but service was a hell of a lot better when Ma Bell was the only game in town. And when IBM separated their hardware, software and consulting/support entities, their customers were less well served than when IBM was monolithic.
nihil obstet
@Steeleweed
It’s not just private corporations. Government monopolies, as long as they get adequate oversight, are much better and more efficient than private competitive firms. The problem, of course, with both corporations and government is how to maintain decent oversight, without regulatory capture.
realitychecker
Just to make a basic, and should-be-but-apparently-ain’t obvious point, you can’t logically claim a fervent belief in the wonderful “invisible hand” mechanism of markets, while simultaneously acting every day to get a very visible beaurocrat’s hand on those same markets in an attempt to control or steer them.
Duh.
Control freaks are out of control.
XFR
The unkind people of the world are not all joined up into some sort of hive mind–again, what about Kim Dotcom? The visible evidence is that being rich alone won’t get you into the club.
XFR
(Not that I’ve seen anything to suggest Dotcom himself was particularly unkind mind you, though I’ve not studied the matter in terribly great detail.)
Hugh
There is no invisible hand. There are no free markets. As I said above, the only questions worth asking about markets, is who’s controlling them and for whose benefit.
realitychecker
@ Hugh
I was merely pointing out the absurd logical contradiction between the theory of markets, and the behavior of govt officials who have the means to attempt to manipulate and steer them. Of course I know that in practice they get manipulated. That is how/why prices periodically get so out of whack that radical price changes must occur to bring prices back closer to a rational valuation.
“Invisible hand” is just shorthand for the decisions of millions of investors as to what they think the correct rational valuation is at any given moment. I see no reason to doubt that that mechanism would work pretty well if various manipulators would keep their damn thumbs off the scales and just let markets be about processing and adjusting for an ongoing dynamic information flow.
But of course, we’ve never seen a thunbless market in modern times. 🙁
Billikin
IIRC, one of Adam Smith’s few references to an Invisible Hand had to do with the fact that capitalists had no easy entree into foreign markets and thus, had to reinvest their profits domestically, thus benefiting their own societies as if by an “invisible hand”. Today, to achieve the same effect would require the visible hand of capital controls.
Steeleweed
@ nihil obstet
And Benevolent Dictators would be the best government if we could find a way to guarantee they were always benevolent, eh?
Kaleberg
There are two other good examples of markets being reduced to oligopolies, both experiments from the 1970s. Airline deregulation worked for a while with new airlines being formed as older ones vanished, but now most flights are run by a handful of companies, and they now know how to crush any upstarts. Telephone deregulation cut the cost of long distance service, but now the markets for land lines and cellular service are run by a handful of companies. Prices keep rising, service is acknowledged as mediocre, but we have a free market. It could be worse, we could have had communism.
@realitychecker argues that one can’t praise the free market while also insisting it has to be regulated. Why? I’ll praise fire as a way to see in the dark, cook food, keep warm, smelt metals and for its countless blessings, but I’ll also insist that fires need to be kept under tight control in hearths, furnaces and so on. The free market is like fire. It can provide all sorts of wonderful things, but like fire, it requires vigilance and control.
realitychecker
@ Kaleberg
“@realitychecker argues that one can’t praise the free market while also insisting it has to be regulated.”
Sir, I’ve not seen your name before, but no, that is not AT ALL what I said, and I’ve seldom been more erroneously paraphrased, even on the Internet.
What I said was that you can’t believe in the “invisible hand” theory and simultaneously be OK with various beaurocrats taking action to deliberately control, dictate, and steer the behavior and direction of those same markets. That has NOTHING to do with necessary ongoing regulation regimes which set fair rules and make sure they are obeyed.
Please acknowledge that you can now appreciate the gigantic difference.