Uber vs HK Taxi – Alignment of interests
Parth ShahParth Shah
Parth Shah
Seasoned Finance, Sales, Marketing and Strategy Professional
發表於 2023 年 6 月 15 日
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Have you noticed how if you hail a taxi from the street, taxi drivers will stop or slow down at every traffic light on purpose? Sometimes they refuse a hail, or charge an obscene price? Whereas if you order a taxi on Uber, the same driver will speed up and drive like he’s in Formula One? Have you noticed the difference of how Taxis drive when they are occupied vs when they are vacant?
This is a classic example of alignment of interests. The taxi’s make more money the longer you sit in the taxi. Not only is distance a marginal earner but waiting time too. On the contrary, the Uber driver earns a pre-booked amount (except for exceptional circumstances of excess waiting or traffic, See note 1), regardless of the time taken (which is built into the pre-agreed fare), thus has no reason to take a detour and keep you in the ride for longer). In fact, Uber drivers are incentivized to go as fast as possible and skip through the yellow lights, so they can accommodate more rides per time period.
The Taxi meter fares are a function of actual ride distance and time, whereas Uber Fares are a function of a pre-determined price (which comprises of a multitude of functions such as distance, demand/supply, traffic conditions, etc.). Taxis are incentivized to stop at every traffic light and keep you on the ride for as long as possible, whilst covering the same distance. They make marginal utility with the distance, and the time stopped at each junction.
Why do we pay a premium to book a ride through the Uber app? Despite the Taxi’s stopping on every light and driving like slugs on purpose where the meter jumps, they would still end up (generally) costing less than a ride booked through Uber. We still use the Uber app for accountability and peace. We can deduce that if one can afford the taxi fares, they can afford the marginal increment to book an Uber. Accountability and peace more than proportionately cover for the difference.
What do we mean by accountability? Accountability in this context refers to the fact that we can give drivers ratings, complain, or even reward drivers for good behavior, driving style, and the ride overall. We feel content knowing that Uber holds their drivers accountable, and they do act against misbehavior. Plus, the ease-of-use of the app, the ease of communication, and solid customer service are all areas where the Taxis hailed on the street don’t provide. We may complain against the local taxis for any misbehavior, but the process and effort generally aren’t worth the potential reward or action against the drivers. Once again, the drivers of the HK Taxis hailed on the street have no incentive to be nice or not be rude, they make the same fare and can vent their frustrations through limited channels. Whereas Uber drivers are rewarded for niceness, and courtesy.
During peak hours, one may have to wait on the street to hail a taxi, and that’s if they don’t charge an obscenely high, non-metered fare. Uber allows you to hail a ride, and go to the street at the correct time, knowing you will have a car waiting. Taxis are a gamble, not knowing when or if you may find one. Why do Taxis charge substantially higher prices during peak times? Because they can. Supply and Demand. Any fare between a usual Taxi meter price and the surge of the Uber, is the price that they can attempt to charge, knowing it’s still lower than the opportunity cost of getting an Uber ride at the same time. Charging a non-metered fare is technically illegal, but once again, who will hold them accountable? And how? The cost of time and effort of enforcing accountability versus the possibility of substantial action by the authorities, just doesn’t seem worth it to most. One usually just wants to get back home or to work. This is also, if people know how to take action against taxi malpractice, which most people don’t. Whereas with Uber, its all on the App.
Additionally, the structure of Uber driver’s vs HK Taxis hailed on the street. HK Taxi’s require a Taxi medallion, which until 2017 costs upwards of HKD$7.8Million (Approx. USD$1 million). Ubers are technically private cars which are “Ridesharing” (a term coined and popularized by Uber). HK Taxi drivers usually can’t afford the medallion costs, so they do end up working for a sponsor or a company who has invested in the medallion. They also have a fare split structure with the sponsor, in addition to the costs of running the taxi (maintenance, fuel, parking etc.). So they are technically their own boss and yet have monetary obligations to whoever is sponsoring the medallion and vehicle. This is one of the primary reasons why many taxis are beat up and broken, the drivers have no incentive to maintain the look or performance of the taxi. Taxi drivers generally work on shifts and are paid a minimal base wage plus a split of what they earn.
Whereas if you look at the Uber structure, drivers work when they want, how they want, and with their own vehicle. This is mainly why one sees Uber cars in pristine condition. Plus, they take home a lion’s share of what they earn (70-80% gross, not including expenses and maintenance), which incentivizes them to drive longer and better. Just knowing that there’s a choice, and the more you drive the more you make, aligns their interests with the app.
Finally, behaviorally society is moving in a cashless direction. The Uber app offers E-payments, whereas Taxis are still majorly cash based. Psychologically, physical cash seems harder to part with than using electronic payments; e-payments intrinsically seem to feel like lower material value, whereas cash is tangible and feels proportionately higher in value. And then there’s the convenience factor, where people seem inclined to carry less and less in their wallets (If they have wallets at all).
If one sees the meter go up incrementally, there are also chances of meter-anxiety. For example, if one sees the meter at HKD$38.40, and they have 2 twenty dollar bills handy, they would be subconsciously inclined to stare at the meter hoping it doesn’t breach HKD$40.3, because we then must break a higher-valued bill (or add an additional bill) and receive coins for change. (Most people in HK don’t carry coins or small change anymore). We would rather just have electronic forms of payment rather than rudimentary cash. Though Taxis are slowly beginning to accept the Octopus Card, it is still lagging with the growth pace of e-payments used in the likes of Uber.
In conclusion, alignment of interests and incentives are the primary causes of most discrepancies in the world and are essential to understand. This philosophy can be extrapolated to most cases and industries that are still primarily human driven.
Note 1: Sometimes Uber does charge extra if there is unforeseen traffic, however if the driver uses the pre-agreed route, Uber’s algorithm uses traffic conditions through third party apps blended with actual time and distance covered by the trip. Usually, the prices are constant, but the driver still has no incentive to waste extra time.
Note 2: I have no affiliation with UBER
Uber
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6 則回應
Parth Shah
Parth Shah
Seasoned Finance, Sales, Marketing and Strategy Professional
2 個月
Finally some action, after years of deterioration of a vital cog in any public transport system. South China Morning Post SCMP
https://www.scmp.com/news/hong-kong/hong-kong-economy/article/3226830/hong-kong-proposes-slapping-taxi-drivers-demerit-points-overcharging-refusing-hires-and-other-bad
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