Discuss Managerial Economics and Business Theory

Founded in 2009 by Travis Kalanick, Uber provides transportation service in U.S., European, and Asian cities. In the year

2014, its gross revenues were $2.957 billion; net revenue after commissions and incentives, $495 million; cost of revenue,

$400 million; operating expenses, $661 million; for an EBIT of $565 million. The original Uber model of operations was for

the driver to use his or her own vehicle and offer services as and when they liked. The Uber webpage for drivers

DBA 7180, Managerial Economics and Business Theory 4

emphasizes that drivers can use their own car, set their own schedule, and get paid weekly. More recently, Uber has

arranged for drivers to rent cars to provide Uber services.

Uber clients book and pay for rides through the smartphone. As noted in Business Insider’s article by James Cook, after

each ride, the Uber client rates the driver on a scale from 1 to 5. If a driver’s rating falls below a particular level, Uber

discontinues her or him from offering the service. Uber also allows drivers to rate clients. In January 2015, Uber extended

fare cuts from the largest U.S. markets to 48 more cities. Uber asserted that the lower fares would benefit clients and

drivers because the higher demand would allow drivers’ incomes to increase. The higher demand makes the drivers more

efficient, so that they can get more trips every hour, which means more earnings for them.

By contrast with Uber, whose drivers provide service with private cars, the Chinese services, Didi Dache (backed by

Tencent) and Kuai Di Dache (backed by Alibaba) are smartphone-based applications to book taxis. In 2015, faced with

competition from Uber (backed by search engine Baidu), Didi Dache and Kuai Di Dache merged. Following the merger, they

continue to operate as separate services.

Based on the case above, answer the following questions:

To what extent do you think that any economic inefficiencies of the original Uber operating model may impact the

operational strategy and ultimately the success or failure of the firm?

Considering the abundance of consumer ethics-related concerns about Uber, do you think that the industry should be