The Oldest Profession

Whenever I hear people talking about the newness and novelty of car services like Uber and Lyft, I am struck by the thought that those services are really just the latest expression of a business model that is as old as commerce itself. (No, not that other oldest profession, but a mischievous mind could find parallels there, as well.) The idea of using one's automobile to make some extra cash is no different, in economic terms, from renting out that room in your house that no one is occupying. It is all about putting an underutilized asset to work. It is this notion of underutilization, paired with an enabling technology, that is really at the heart of the economics here.


I will draw one conclusion from observing my friends' and my own use of the services, but this is purely anecdotal, not statistical. On those occasions when I have known my friends to be using Uber or Lyft, I have wondered what these friends would have done for transportation had those services not existed. Would they have called a taxicab? In most cases, no. They would have driven themselves. So, to the extent that this pattern of usage is true beyond my own experiences and observations, I would conclude that the existence of Uber and Lyft is actually enlarging the market for "someone else doing the driving." Sure, they are undoubtedly taking some market share away from taxis and more traditional car and limo services, but from what I see, Uber and Lyft have created a new market of clients who can whip out their smartphones (which they are always engaged with anyway) and summon a ride. This means that people who would otherwise have driven themselves are riding in the back seat--and not behind the wheel. There is a public safety benefit here that the vociferous opponents of the services, the folks who want them banned, should have to deal with in their efforts to keep Uber and Lyft out of the market.

As for the economics, the car services are part of what is being called the new "on demand" economy. Looking at the old economics, though, I would call it a variant of market-clearing pricing. An unbooked hotel room, for example, represents an opportunity cost to the hotel's proprietor, lost revenue that cannot be recaptured. As the date of the vacancy approaches, the hotelier has more and more incentive to book the room at whatever price will draw in a guest--the market-clearing price to get the room booked. The free flow of information is essential to the smooth functioning of a free market, and that's where the Internet comes in, putting that room "on the market" for prospective travelers who might be willing to pack a suitcase at the last minute in order to snap up a bargain. Or consider the off-price retailer T.J. Maxx (TJX, $68), which sells in-fashion clothing at discount prices. The selections here are items that didn't sell at full price elsewhere, and TJX has trained its followers, the "Maxinistas," to check the stores frequently, because the inventory is always changing. And then there is the most familiar example of all, eBay (EBAY, $54), which has given new life to the idea that "one person's junk is another person's treasure." Want to get rid of the stuff in your attic without going to the trouble of having a garage sale? Well, just snap a photo and post the items onto eBay. These are all just variations on the simple idea of trade, with the Internet and smartphone apps taking the place of the want ads.

On a recent outing with Uber, my app informed me that I would be charged 4.2 times the standard rate due to a spike in demand for cars. I had to agree to that, which I did, because it was still a bargain. The driver explained to me that Uber jacks up the prices when demand jumps as an enticement for more Uber drivers to hit the streets and pick up passengers. That, of course, is exactly how supply and demand are supposed to work. If that sounds novel, it would only be because so much of the economy does not allow for the price mechanism to work its magic by responding immediately to changes in supply and demand. The technology makes this possible. This same driver told me also that one night over the Christmas holidays he had made $1,000 in fees and tips, and that he regularly made about $1,000 a week driving for the service full time.

On another night, this one with Lyft, the app wasn't functioning properly. It was telling me that the driver was still seven minutes away even as he pulled into my driveway. The app never acknowledged that he had picked us up, so it couldn't process the transaction for payment when we were dropped off at our destination. I asked the driver if there might be someone at Lyft he could call about the problem. Well, guess what? There isn't, so I settled with him in cash. I love the ease of pressing a button on my phone to summon a ride. It means I don't have to be on hold with a taxi dispatcher, but that is exactly the person I miss when the technology fails. When advances in technology are applied in innovative ways, the result is "creative destruction." Amazon (AMZN,  $370) brings us the ultimate virtual store of anything and everything, but the price we pay is that one day I'll find myself explaining to my grandchildren what a bookstore was. So, we can probably add taxi dispatcher to the list of jobs laid to waste by the bulldozer of progress.

Since I am a great champion of free and unfettered markets, I have to come down on the side of letting the car services compete for business in the marketplace. Of course, another component of a free market is that everyone is supposed to play by the same rules, and it is here that the legacy taxi companies have a point. The answer, though, is not to ban Uber and Lyft, but to instead work out something else. I also have had great experiences with our drivers, not one of whom has reminded me of the latest serial killer from Criminal Minds. The mutual rating arrangement between driver and passenger probably puts more pressure on the driver than on the passenger, and it seems to work. A drunk, unruly, and rude passenger can likely find another source of transportation in the future, easier than a driver can find another job.

One night late when my wife and I were picked up by Lyft to go home, the young lady in the driver's seat looked at me in her rear view mirror and asked, "Do you remember me, Mr. Taylor?" I have never been particularly fond of that question, but she went on to explain that she had attended school with one of our daughters. And yes, I did remember her. She is working full time as an attorney and driving for Lyft to pick up some extra cash. And I suppose it is reassuring to know that if times get tough, I can always pimp out my car.

Life is short. Get busy.

Jim

Disclosure/Disclaimer: My family members and/or I own shares of TJX, EBAY, and AMZN. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.