Uber and AirBnB Research Paper

George Stoitzev

Law & Economics

Current Legislation, and the potential for Pareto Efficiency from Uber and AirBnB

Abstract: Understanding the dynamics of two major disrupting frameworks and the ways in which they continue to shape the new law and economic landscape. To do this, I analyzed the current laws, lobbied for by previous oligopolies, showing the inefficient systems that cause increased friction between customer and employee. I demonstrated methods, and technologies Uber and AirBnB use to counter legislation, gather resources, and provide indispensible value to all parties. By understanding the dynamics in place from all areas of study, I created a framework from which one can determine the best course of action in accordance with “optimizing Pareto efficiency” in terms of “value.” Value, in the quantitative space, is the monetary outcomes of reducing friction between parties. This is done by optimizing employee and customer creation, formation, and transaction. Qualitatively, value is determined by methods of reducing “frustration” while increasing “overall satisfaction.” By creating the framework of truly optimal economic systems we can analyze how current laws fail, how Uber and AirBnb succeed, and why progress is inevitable.

Introduction: The Internet, big data, and transparency have facilitated the exponential growth of peer-to-peer marketplaces. The combination has taken otherwise underutilized goods and services, which would be too cumbersome for previous systems, and created frameworks that optimize Pareto efficiency from an Economic and Social standpoint. Users rent rooms on Airbnb from their fellow man instead of a corporation, and arrange rides from “everyone’s private driver” with Uber. The interconnectivity has broken down barriers and increased transparency, thereby increasing empathy and thus safety. By understanding the otherwise hidden variables, fear is diminished; empathy for your fellow man increases, and safety is achieved. Uber and Airbnb have utilized this newfound individual assurance of their fellow man, and the accompanying technology that enables this connectivity to optimize Pareto efficiency for the modern age. The

George Stoitzev

Law & Economics

“value” provided by Uber and Airbnb is evident, but laws created by the lobbying of previous corporations and frameworks have created barriers in order to maintain position and maximize profit. These laws, which are enacted to best serve the people, need to be adapted in order to enforce what they were originally created for. Government, for the people by the people, has a responsibility to maintain a position for the best interest of its constituents. By preventing technological frameworks from optimizing our society from a economic and social standpoint we counteract the virtues we strive for. This paper will provide an in-depth examination of the current legal environment, and demonstrate the “value” created by Uber and Airbnb to justify the adaptation of legislation. The “value” is derived from dynamic pricing, peer-to peer exchange, and the reduction of “physical” friction. Section 1 will provide the framework for understanding Pareto Efficiency, and the ways in which it will by optimized through the technologies provided by Uber and Airbnb, alongside the social landscape that enables such progress. Section 2 will analyze the legal environment both domestically and internationally. The section will primarily focus on the laws Uber and Airbnb are circumventing, and the rational for doing so under the framework of Pareto Efficiency. Section 3 will discuss the economic and social landscape of the current state of affairs. This section will demonstrate ways in which technological progression is accelerating beyond the ability of governmental legislation adaptation. It will describe how Uber and Airbnb have been enabled by our current society, and how these disrupting companies have brought to surface the need for governmental change in order to maintain growth and achieve Pareto Efficiency in all domains. Section 4 will give background to the leaders, and the mindset of this new breed of venture capital backed technological companies. This section provides an indepth look at the tactics employed by these hungry entrepreneurial start-ups and their progression into the mainstream. I will show how leadership, and company

George Stoitzev

Law & Economics

vision has provided laser-like goals no matter the obstacles. How venture capital has enabled these companies to defy the norm, and why they are now too big to ignore. Section 5 will deal with the “value” that Uber and AirBnB provide. It will deal with what needs they fill, and how these needs benefit all parties. How the technology has enabled both companies to spur copycats throughout the world, and how this technology has reduced friction in all areas. This reduced friction will be measured quantitatively as well as qualitatively. Both areas will demonstrate why this new framework has positive repercussions for the users, and society as a whole. Section 6 will combine the properties of Pareto Efficiency with both companies in regards to the progression of “value” created. It will synthesize the technological aspects that enable this progress, and give rational as to why legislation will conform to the new standards once “value” has been demonstrated adequately. Section 7 Long term vision and Conclusion

1. Pareto Efficiency Pareto efficiency is a state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off. Pareto efficiency makes no statement about equality. In an idealized free market scenario there are no externalities, all markets are in full equilibrium, markets are perfectly competitive, transaction costs are negligible, and market participants have perfect information. According to the Greenwald-Stiflitz Theorem perfect information is vital. This theorem states that any competitive equilibrium leads to a Pareto efficient allocation of resources. It is an analytical confirmation of Adam Smith’s “invisible hand.” It is important to note that becoming Pareto efficient requires perfect information. Perfect information in the real world is impossible. The amount of information present, combined with the human inability to biologically comprehend all information to make the “best” decision is inevitable. Friedrich Hayek emphasizes

George Stoitzev

Law & Economics

that society has become specialized to an unimaginable degree, and that the inability to synthesize all areas is what leads to creating an inefficient governmental system. He argues in his Magnus Opus, that a “Spontaneous Order” from the free market can progress towards our economic ideals. That we must go against our natural tendencies to manage in a governmental stance in order to achieve what we try to achieve through management. To achieve the idealized perfection of information may not be possible through any one individual, or perhaps collectively through the free market, but progress is possible. Internet, cloud storage, and big data have enabled interconnectivity on an incomprehensible scale. Transparency in all areas has brought about the possibility to achieve a Pareto Efficient society we strive for. In today’s society we have the power to understand the dynamics of things previously hidden. We can see through the “eyes” of others. We can see the personalities through the collection of all that they are. Through the analysis of their social network, their entertainment, and their courses of study, all of us have the potential to understand one another. As we understand one another we begin to gain empathy. This empathy reduces the fear and anxiety in the presence of otherwise strangers. We have been engrained with the evolutionary capability to empathize and be altruistic, but within our “tribe.” This modern tribe has been extended virtually to the entire world, and with that power we can achieve wonderful things for the betterment of all. We can achieve a Pareto Efficient system of allocation. Uber and AirBnB have understood this new trend of social communication. They have implemented their technologies to enable the increased empathy of man in two areas. AirBnB have allowed anyone to host another in their “private” home. Uber has allowed anyone to drive another in their “private” car. The understanding of your fellow man, provided by the interconnectivity of the internet, has mitigated fear and enabled safety. With this social and technological progression these two major companies have created frameworks to achieve Pareto Efficency and provide immense “value” to all parties.

George Stoitzev

Law & Economics

The frontier line is demonstrative of Optimal Pareto Efficiency. It is the perfect allocation of resources. This is impossible in the “real world” because of the inability for mathematical perfection, but the gap could be closed upon. These imperfections are a result of rigidities. By embracing technology, Uber and Airbnb

George Stoitzev

Law & Economics

have created “value” through the minimization of “friction” and the maximization of human and capital resources. As we become more Pareto Efficient it becomes more probable to achieve a state of increasing relative inequality. This transparent “inequality” creates social uprise over “fairness” but is mitigated by an overall shift is TOTAL VALUE. Those factors of justice and fairness, as expounded by Friedrich Hayek, should not prevent Pareto Efficiency, because doing so would render society worse off in the long run. Section 2: Legal Environment The legal environment that Uber and AirBnB operate under varies from municipality, city, state, country, to continent. The governmental disfunction stems from a previous generation not bounded by the interconnectivity of information, and interaction. It has lagged behind as technology has accelerated beyond the capabilities of governmental adaptation. This dichotomy has resulted in inefficiencies, confusion, and “friction.” Governmental legislation can no longer properly perform its function, which is to “provide what is best for its constituents.” This inability, highlighted by Hayek, has been illuminated these past couple years, and major change to the fundamental framework must take place in order to achieve the virtues we strive for as a human species. Although there are thousands of discrepancies between the interactions of these laws, major commonalities are found. For Uber and AirBnB the problem rests on not operating with the same insurance, and licenses that the traditional services require. This circumventing of “physical friction” allows both companies, and its employees and customers to receive a far superior product and service in accordance to Pareto Efficiency and “value” creation. Uber operates in virtually the same capacity as the taxi cab industry, and AirBnB operates as a short term rental space in the same manner of hotels. The argument by both companies is that it doesn’t. It doesn’t because the traditional laws don’t apply to their case. They are not the taxi industry, and they are not the hotel industry. These are a special case not yet understood and accounted for by current legislation. The discrepancy comes from the fact that “Uber” does not “own” the cars, or “employee” the drivers. AirBnb does not “own” the location shapes, nor does it

George Stoitzev

Law & Economics

“employee” its clients. These companies are merely facilitators of agreements. They operate under the notion of achieving the ideals of a free market society. Where there is perfect information, supply and demand equilibrium, and reduced “friction.” By “owning” any part these companies would lag behind, and be unable to focus on their role. Their role is to help achieve Pareto Efficiency by focusing their efforts on utilizing technology to allocate resources optimally. Jurisdictions around the world have issued Uber and AirBnB cease-and-desist letters, and threats of lawsuits. These obstacles have been responded to, mostly, by ignoring the issue. Innovations in technology that threatens the current legislative system, lobbied for by previous corporations, have always been met with opposition. This natural occurrence should not deter innovation that creates “value” and improves society as a whole. The barriers have been quite literally “run” over by these venture backed companies. Uber and AirBnB now have not only proven their value creation, but also have the capital and arsenal to battle any form of obstruction. These Venture backed companies have the resources to revolutionize the world in which we live in. Companies throughout the world have taken the technology from Uber and AirBnB and replicated its service in their respected area. To give some perspective, reports say Uber is raising capital at a 40 Billion dollar valuation. That is 40x the valuation just 18 months ago. AirBnB is valued at 13 Billion. These companies are both 6 years old. This war chest of over 1 Billion in liquid M1 allows them to expand and dominate their respected industry. The Social Economy Pyramid: Years to Reach $10 Billion Valuation Mark

George Stoitzev

Law & Economics

The issue rests on liability. As private consultants the companies contest that the liability outside of the service they provide is on the individual. They are not employees, nor is their property owned by the companies. The traditional legislative mold needs to adapt to the modern ecosystem, and be cognizant of the value created by these two disrupting companies. The taxi-cab oligopoly and the huge barriers to entry that come with the hotel and taxi industry prevents innovation that provide “value” to all parties. These oligopolies are rooted in the physical domain, and as a result have friction present that prevent Pareto Efficiency. The fixed supply of taxis in major cities, alongside the fixed price creates friction. This friction is not as present in the hotel industry because of accompanying technology that creates matches. These companies like Kayak, Priceline, etc provide immense value to the hotel industry, but AirBnB operates in a parallel industry. They are the Bitcoin of the traditional short term rental space. They have enabled a true peer-to-peer market based on private property on a global scale and merely facilitated transactions. This peer-to-peer marketplace needs to adequately match and connect parties in very time and location sensitive arenas. That is the function of these “software” companies. They take resources and capital and allow them to reach Pareto Efficiency. As for regulations for Livery Vehicles, It is unlawful for any person to drive a public passenger vehicle equipped with a meter which registers a charge of any kind. Chicago Muni. Code 9-114-060.“Livery Vehicle” means a public passenger vehicle for hire only at a charge fixed by agreement in advance. Chicago Municipal Code 9-114-280. In Chicago, under local ordinance, it is unlawful for any person other than a livery licensee or his agent to represent to the public that he renders livery service. Chi. Muni. Code 9- 114-020 (c). Additionally, in Chicago, no dispatch service may serve both taxicab and livery license holders. City of Chicago Rules and Regulations for Radio Dispatch Services Rule No. 3. This is the Yellow Group lawsuit against Uber using the Lanham act. A party is liable under 43(a)(1)(A) and (B) of Lanham Act, for: (A) false representations concerning the origin, association or endorsement of good or services through the

George Stoitzev

Law & Economics

wrongful use of another’s distinctive mark, name, trade dress or other device (B) false representations in advertising concerning the qualities of good or services. A party bringing suit under Lanham Act must assert a discernible competitive injury. Without an injury, plaintiff lacks standing. Uber invokes Marvellous Day Elec. (S.Z.) Co., Ltd. v. Ace Hardware Corporation. Uber is on different level of distribution chain“ Plaintiffs include taxi licensees, taxi affiliations, and a livery service.” “Uber is a software company and a licensed radio dispatch service and, as such, puts members of the public seeking transportation in touch with licensed taxi and black car drivers.” Whether Uber has violated any municipal regulations is an issue squarely for agency consideration and resolution.”Because “agency decisions are frequently of a discretionary nature or frequently require expertise, the agency should be given the first chance to exercise that discretion or to apply that expertise.”Agencies such as Chicago Department of Business Affairs and Consumer Protection should interpret or write new rules. Uber’s basic argument is that they are different from a taxi company, and on a different level of the distribution chain. Thus, you cannot sue under Lanham Act. We are so different, that regulatory bodies do not know how to apply their existing municipal regulations to Uber. Thus, agencies need to rewrite their regulations. Uber have understood the role they must have in politics in order to achieve acceptance in both the local and federal level. They hired David Plouffe, Obama’s campaign manager and a political stratagest, in order to lead teams into the political landscape. Uber has to convince legislators and the public that their service is providing immense value to all parties, and making society better off from their efforts. That the issues of insurance and licenses are not the same as traditional systems, and that they must be adapted to better suit this modern environment. David Plouffe said, “Uber has the chance to be a once in a decade if not a once in a generation company. Of course, that poses a threat to some, and I’ve watched as the taxi

George Stoitzev

Law & Economics

industry cartel has tried to stand in the way of technology and big change. Ultimately, that approach is unwinnable. But I look forward to doing what I can right now to ensure drivers and riders are not denied their opportunity for choice in transportation due to those who want to maintain a monopoly and play the inside game to deny opportunity to those on the outside. I could not be more excited to join such a vibrant company and its people who will be at the absolute leading edge of tomorrow’s innovations and changing people’s lives and their cities for the better. It will be a privilege to jump in the foxhole with the team at this great startup and get to work.” Uber has run into some controversy after an executive told reporters he should hire to find “dirt” on the journalists reporting potentially damaging claims.

George Stoitzev

Law & Economics

This summary details ways Uber and AirBnB deal with regulatory objections raised in select jurisdictions around the world. 

appealing directly to the relevant authority to change the regulation

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pressuring the local community to appeal to the relevant authority

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temporarily or permanently withdrawing the product from the market

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changing the product to comply with the regulation

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challenging the regulation in court, and in some cases continuing to engage in the challenged conduct, or

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paying fines while continuing conduct that contravenes the regulation The last two cases may be why it appears that Uber and AirBnB are continuing to operate despite the law. The Singapore government has responded to the rise of Uber, GrabTaxi and other new taxi-app services by introducing new regulations (published a few days ago on Nov 21, 2014) through the Land Transport Authority (LTA) effective Q2 2015: These regulations have come about after a year-long consultation with various groups: commuters, the National Taxi Association, third-party taxi booking services and taxi companies. They'll require registration of services, provision of customer service, capped fees, licensed taxis and drivers. The effective change makes these taxi apps operate just like regular taxis: no pretrip tipping, not allowing pre-specified destinations, etc. Part of the reason is consumer safety and interests, especially to allow them to remain equally accessible to all members of the public, and prevent choosy drivers. The LTA is giving enough time (more than 6 months) for these taxi services to become compliant to these new regulations.

George Stoitzev

Law & Economics

For Airbnb, both the Housing Development Board (HDB) and Urban Redevelopment Authority (URA) have specific regulations and guidelines against short-term rentals under 6 months. The reasons given are that "HDB flats are meant for owner-occupation" and "majority homeowners prefer to retain the residential nature of their properties. Allowing residences to be used for short stays leads to high turnovers of occupants, and gives rise to nuisance and safety concerns." Enforcement of these regulations have not been done against Airbnb but against the homeowners who list their properties on these sites. Both the HDB and URA encourage "feedback on any suspected cases of unauthorized subletting" by any member of the public. Over the past few years, they've been investigating hundreds of complaints and violations of this sort, resulting in many warnings. Penalties and confiscations Singapore is an immense adaptive society that will have major implications for legislation around the world. San Fransisco have recently passed the “Airbnb law.” The law allows only permanent residents to offer short-term rentals, establishes a new city registry for hosts, mandates the collection of hotel tax, limits entirehome rentals to 90 days per year, requires each listing to carry $500,000 in liability insurance, and establishes guidelines for enforcement by the Planning Department. The measure, which passed 7-4, is slated to take effect in February, 2015. Chiu ( Board president) and other supervisors said they sought a balance between preserving affordable housing — by making sure landlords can’t convert permanent units to more-lucrative vacation rentals — and allowing residents to earn extra income by renting to travelers. “We can protect our city’s housing units from being converted to hotels, while also allowing short-term rentals on a limited basis to help residents afford to stay in their homes,” Chiu said in a statement after the vote.

George Stoitzev

Law & Economics

Airbnb has said it will start collecting and remitting the hotel tax this month, something Chiu said was spurred by his legislation. It should bring at least $11 million a year to city coffers. In New York Mr. Schneiderman (New York Attorney General) and city regulators will also announced a joint enforcement initiative to shut down illegal hotels. Various regulators will investigate violations of building and safety codes and tax regulations. “Anyone operating an illegal hotel should be on notice that the state and city will take aggressive enforcement actions in this area,” said Mr. Schneiderman. “A slick advertising campaign doesn’t change the fact that this is illegal activity.” AirBnB has grown to enormous levels in major cities, and to completely eradicate this service is impossible at this point. Mr.Schneiderman claims that “72%” of these rentals are illegal. The claim is based on the fact that 6% of hosts make 37% of the revenue. There are currently 35,354 unique places in New York. This huge discrepancy demonstrates that the Airbnb’s claim that it, “allows longtime residents to stay in their homes by earning just a little extra money to help make ends meet,” is wrong. Individuals are acting as de facto hotels without the added regulation, licenses, and taxes. These claims seem to be accurate, and are demonstrative of the Pareto claim that 80% of the results are from 20% of the inputs. These are natural occurrences, but ones that have been turned into reasons to restrict certain forms of the service. New York has yet to completely institute a new law, or enforce its legislation so the next few months should be interesting. Section 3: Economic, technological, and Social Landscape Today’s modern global society has been enabled to flourish by the interconnectivity of the internet. This informational transaction does not garner the same physical constraints of the previous model. Allowing connectivity to take place on this global level binds us together. With this bonding we can exchange information and ideas to create something previously impossible. We know have the potential to access all of histories ideas at our fingertips. We can

George Stoitzev

Law & Economics

communicate across the world in real time. We can crowd fund our individual ideas and gather capital from a diverse group of people. We can transmit monetary value, and understand ourselves through the understanding of others. Payment transaction and accurate GPS is invaluable for Uber. They rely upon this as the foundation for their service. In order to provide the immense “value” to customers and drivers they must minimize friction. This friction comes in the form of slow transactions from traditional frameworks. The taxi industry still relies on cash, and since they don’t have a centralized framework they scower for customers. This scowering wastes time for both the driver and the customer. This wasted time is translated in wasted capital. The coordination is cumbersome compared to Uber’s technology. Uber coordinates the parties, they reduce physical friction, and provide efficient communication. They use Garmin for GPS, Realtime/dispatch systems are built on Node.js and Redis. Business logic all lives in an API built on Python, MySQL and Mongo. Crazy math and science for ETAs, demand and supply prediction is also done in Python. Websites, including large code bases for internal operations and partners/drivers, are on Backbone.js. Objective-C and Java for the iPhone and Android apps. The technological “stack” used by these innovative companies have enabled them to revolutionize the flow and reduce “friction.” This improvement in all areas enabled by software and data has created services that are Pareto Efficient. All of these improvements and changes in the social landscape must have happened in order for these companies to be as influential as they are today. This 0 to 1 change is really a 1 to N if analyzed further. Everything is building on top of one another and shifts horizontally happen when all the pieces come together to create something innovative. By utilizing the ability to gather greater amounts of resources, human capital, and information we can create immense value that can be shared. This is demonstrated in concerts, buildings, airplanes, and ironically the internet. We gather and create something majestic that cannot be created by any one individual, but that can be equally shared once created. This utilization of a mass of potential creates things impossible without the joint effort of a global society.

George Stoitzev

Law & Economics

 Bonding Capital: formation of strong ties. There is a high degree of homogeneity, as individuals tend to reinforce shared practices, norms and similarities.  Bridging Capital: formation of weak ties. This power comes from the ability to facilitate trust by providing transparency into the credibility of individuals.  Linking Social Capital: formation of links between vertically/horizontallyseparated groups. This is the transaction and value-capture side of the equation. Uber and AirBnB have taken the technology present, and combined it on a global “physical” level. They have taken the online interconnectivity and used it to

George Stoitzev

Law & Economics

allocate resources on an otherwise physical domain. They have created “value” by making the system Pareto Efficient. They reduced the friction of matching supply with demand on strictly a peer-to-peer plane. This “sharing” economy has the potential to maintain the advantages of having private property with the added benefit of sharing underutilized resources. The optimization of private property and Pareto Efficiency is what Uber and AirBnB is striving for.  Low-Cost Producer. The incumbents’ high fixed cost structure (which provides them with process and scale cost advantages) is becoming a competitive disadvantage as many travelers have grown tired of the impersonal experience of staying in cookie-cutter hotels and the inefficient and impersonal experience of traveling in taxis. In comparison, Social Sharing companies such as Airbnb and Uber are the ultimate low-cost producers as they have close to a zero marginal cost model as they have the potential to create infinite supply by empowering individuals to generate income from under-utilized personal assets (i.e. Property, Plant, & Equipment such as a house or car and Human Capital such as property management or chauffeuring services).  High-Switching Costs. Customers are no longer held captive to the incumbents as Airbnb and Uber now present more attractive and personal alternatives.  Intangible Assets. The value of a brand name is depreciating as Airbnb and Uber are creating Long Tails in travel by replacing artificial institutional trust with Social Capital by democratizing the tools of production and distribution and connecting supply and demand by capitalizing on the filtering efficiency of social network reviews and facilitating trust through dual accountability systems (i.e. both the hosts and the guests rate each other).  Network Effect. Unlike hotel and taxi companies that seek to constrain supply to keep prices high, Airbnb and Uber are creating structural assets that appreciate in value as they attract more and more new hosts/drivers (i.e. supply) and travellers (i.e. demand) to their platform, leading to the ultimate network effect. Current legislation around the world is preventing innovation to take place. Governmental persecution of radically different frameworks, that maximize

George Stoitzev

Law & Economics

Pareto efficiency, in order to maintain the status quo should be eradicated. Spontaneous Order in the manner that Hayek idealized would allow the free market to truly function properly. The issue of allowing the free market to flourish without governmental interference is that there could be incidence where there could be irreplicable harm that is non-localized. This threat to the immediate safety of humanity should be cause for alarm, but the current system of governmental legislation is preventing beneficial “value” to be created from the new technology being created. This technology which is accelerating at an exponential rate has crossed the point in which it competed with government for control and rules. From this point on traditional government is in a position where it cannot adapt to the universal landscape shaped by technology. Change must take place on this manner as well. Although this manner is immensely complex, government can allocate their focus on enforcing the precautionary principle on manners that are non-localized. These include Global Warming, GMO and monoculture, and cryptography security. Section 4: Leaders and Mindset The leaders of both companies come from the original founders. Travis Kalanick & Brian Chesky both tied for #1 on the year end countdown of the most influential people in Fortune Magazine. As serial entrepreneurs in Silicon Valley, they had influence and access to many influential individuals that can mentor and shape their companies into what they are today, and what they could eventually be. Their efforts in utilizing emerging technologies to explore markets, not yet created, is enormous. They paved the way for a multitude of other companies to follow their footsteps and utilize their model for markets ranging from laundry (Washio), to building ikea products (Taskrabbit), to delivering takeout (Grubhub). These two founder and CEO’s clashed heads with the existing laws, fought hard to demonstrate the economic worthiness of their service, and became a beacon for positive change. They hustle and operate under the determination of a small start-up. They consider themselves the underdog even though they have huge valuations, because they see the vast potential to be a global leader. They have had many competitors that threatened their stance, but ruthlessly did everything in their power to be the leaders. They innovate with each passing day,

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Law & Economics

implementing services that benefit all parties. They understand the long-term potential if they provide the most “value.” They understand that the service they provide must be orders of magnitude better than the nearest competition. They continue to hire incredible talent, improve algorithms and methodology, and reorganize structure to maximize efficiency and create value through less friction. Airbnb’s mission is to “unlock unique spaces worldwide” and infuse a sense of belonging and home into each destination. The spaces are more than just a place to sleep for a few nights, they are places that tell the story of the individual living there. Their favorite coffee shop, their personality, and their sense of style is infused within their home and location. This creates an atmosphere that bonds each other together. Understanding your fellow man on a more in-depth level is the key towards empathizing and feeling secure. Uber aims to attain the same form of capital through its service. UberX is a way of personalizing the experience of getting to your destination. The drivers are humanized, and the vehicles are regular cars. This allows the atmosphere, alongside the payment system, and matching system to ease both parties. This experience is further enhanced once realizing that UberX is roughly 20% cheaper than Taxi. This “value” created by both companies makes attracting and keeping customers and clients come naturally. Section 5: The “Value” Uber and AirBnB provide Uber is a mobile application which connects passengers to willing, private drivers who pick them up and drive them where they need to go, much like a taxi service. Uber itself earns revenue by taking a 20% cut of fare cost. The taxi market currently is an oligopoly in the sense that it has laws in place with constrict the availability to enter into the market. The typical taxi licenses are enormously expensive for an average individual to own outright. This high barrier to entry is characterized by monopolies and is prelevant in the taxi industry throughout the world. This traditional system is not as efficient as Uber, and creates tension from creating any Pareto efficiency from the rigidness. This fixed supply and price creates unnatural friction that bleeds into optimization.

George Stoitzev

Law & Economics

Uber has entered the market whether or not it is legal of them to do so under current laws. They have side stepped many of the barriers, and eliminated the need to purchase a license. This caused many individuals to seriously consider Uber as an outlet to enter because of the accessibility, pay, and freedom of work. The emergence of other similar spawns to Uber came as well. These services such as Lyft and Halo battled to undercut each other’s prices, and create incentives for both consumers and drivers. They entered into almost a perfect completion, but that also featured dirty tactics like poaching drivers, and manipulating each other’s services. They had the liquid capital to subsidize the potential for short term profits for long term domination. In the picture below is the comparison of the two Silicon Valley companies that battled for control. Although they are similar they have experiences that are somewhat different. Lyft is more casual and “spunky” than Uber. Lyft makes the drivers place a pink mustache on the front of the car, and the drivers don’t have any dress codes. They are truly just your average people making calls and driving people around. Uber and even UberX is more sophisticated, but still casual. They have some dress codes and some vehicle codes, but try to uphold an experience that is more than just your average person driving you around. They still maintain the friendly atmosphere, but have a touch of modern ambiance imbued within their service. The amount of funding and valuation size is dramatic. This has enabled Uber to expand more rapidly both domestically and internationally, and bring additional incentives to both parties in order to get them within their framework. They aim to bring people on board and have them view Uber as their primary source of transportation. They want to eradicate Lyft, and give them no potential for profitability in this considerably low margin business. Currently Uber is flooding the market in India and China with extremely low cost options compared to copycat competitors. Uber is willing to take 50% loses on certain journey’s in order to gain loyalty, and establish themselves as the leader in the future. They are hemorrhaging cash into these markets with the capital these gained from investments at an increasing high valuation levels. (40 Billion as of latest news, 18 billion only a couple months ago)

George Stoitzev

Law & Economics

This is an example in game theory called the Bertrand game, where two firms are constantly bidding prices down in order to attract market share until they reach the zero economic profit condition. Furthermore, as more companies begin to enter this taxi market we can even see more characteristics of perfect competition. This diagram below features the price war of Best Buy and Amazon. These companies are willing to reach the point of marginal cost in order to take away market share and become dominant. They are sometimes even willing to go below this point and subsidize the products or services in order to draw the other

George Stoitzev

Law & Economics

out of business. These tactics are focused on the long-term potential of being the leaders in the market. By reducing the short term profits in this small subsection they can capitalize in the long-term in areas of higher profitability. They solidify themselves as the leaders which provide the most “value” to the customer, and as such receive loyalty on anything else they produce. It is important to note that this is becoming possible because of the change in perception of the public and the accessibility of capital resources. They resources come from venture capitalists who understand the potential of using these methods in order to convince the public when it comes time to IPO.

George Stoitzev

Law & Economics

The simplicity of the UI and UX on both the driver and customer front-end allows Uber to dramatically reduce “friction” from the inability to properly utilize their technology. By creating this simplistic both parties can achieve what they set out to do without the unneeded “hassle.” The back-end of this incredibly powerful service is dramatically more complex, which allows for properties to be integrated in the future. These future advancements will not only help achieve Pareto Efficiency, but will shift the whole curve forward by “creating” value. Another key feature of Uber which has intrigued economists is the concept of price surging. Uber’s business model represents one of the most basic principles of economics: increased demand raises prices and allows supply to expand. One example of this is during a snowstorm in New York in December 2013. The road conditions were terrible and there was a deficit of usual yellow taxis, leaving many stranded. In this instance, Uber increased its fares up to six fold. While many customers have labeled this as ‘price gouging’, it achieved its intended effect of incentivizing drivers to hit the roads and meet the demand willing to pay these prices. This phenomenon is so intriguing because unlike many markets,

George Stoitzev

Law & Economics

demand and supply adjustments are made instantaneously. Although this is not a perfect bidding market, but rather algorithm based pricing, it’s still fascinating to see information immediately reflected in prices. Uber has slashed it Uberx prices by 20% and agreed to cap prices during emergencies in New York. This policy intends to strike the careful balance between the goal of transportation availability with community expectations of affordability during disaster UBER CEO argued. New York law prohibits price gouging in order to provide consumers with critical protections to which they are entitled under the law. The latest legislation reached an agreement with Uber on preventing price gorging during emergency situations. This does not affect much considering the percentage of these “emergency” situations in remarkable low. The effect is negligible, but the Uber looks better and the public is happy for this little nugget. This picture demonstrates the UI shown to customers when faced with the decision to go through with surge pricing. This incredible transparent system of notifying customers is now under fire. This is primarily because the public is not used to being notified in this manner. Other industries that utilize the abilities of price discriminations to manage supply and demand, and capture the most profit from different demographics aren’t as transparent. This has been a reason for Uber’s ban in Las Vegas and its controversy in Main Stream media. This overcompensation will cool as understanding deepens.

George Stoitzev

Law & Economics

George Stoitzev

Law & Economics

Regulations for Taxis: Taxis are not permitted the luxury of doubling, tripling, or even quintupling their rates as Uber does, just because it is raining or a holiday. Chicago Municipal Code 9-112-600.Rule TX05-07(c)(2) specifically prohibits a licensee from imposing on a consumer “an extra fee or surcharge for using noncash electronic forms of payment.” “It is unlawful for any person to demand or collect any fare which is more than the rates established by ordinance. Uber does not have to abide by these rules since it is not considered a “taxi service.” Overall, the case of Uber is truly a fascinating one from an economic standpoint. It showcases the power increasing technology has in transforming markets and equipping consumers and suppliers with information. Perhaps the most incredible aspect is the fact that in the case of Uber these economic concepts and changes appear quickly right in front of our eyes. Price discrimination is prelevant in many fields like the movies, or airlines. Dynamic pricing in the more rigorous sense was pioneered by The CEO of American Airlines (Robert Crandall) in the 1980’s. He saw this as a way to fight off competition from discount airlines like People Express, while keeping prices for tickets brought closer to takeoff as high as possible. This yield management has become integral in the business models of hotels, and rental-car companies, and can be fully Pareto efficient with increase in data and analysis. Technology has made it easier to segment the market and change prices based upon many variables that are invisible to the average consumer. These include crawling your search history, your social media, and your recent purchases. Uber has taken some slack partly because they were not as transparent about their price gouging to consumers straight away. Ironically, once they did they left many angry of even being charged higher for popular hours. The need for honestly and transparency is very important to the Western world, and paradoxically can ease the slack from those that commit wrongs. The fact that a wrong has been committed could be subdued with telling the truth. This is Pareto Efficient because we don’t have to allocate resources to find the “truth.”

George Stoitzev

Law & Economics

The traditional taxi service was fixed and couldn’t efficiently price discrimination both because of the law, and because of the inability to gather meaningful data. The dynamic pricing structure Uber utilizes is beyond the normality typically associated with this service, and the fact that there is no “discount” in this pricing makes the distasted that more palatable. The DEEP irony here is that Uber offers the most economically sensible, and useful, example of dynamic pricing in the economy. Although this can be viewed as “squeezing every possible dollar from customers” it can also be viewed as creating equilibrium in the supply and demand of the service. The first texted dynamic pricing in Boston in 2012 “increased on-the-road supply of drivers by 70-80%.” The company itself should take no money during surge periods (it now takes 20 percent of every fare), so all the money goes to the drivers. Or it should cap prices to consumers but pay the higher price to drivers, essentially subsidizing people’s rides in surge periods. Or when prices rise really sharply, Uber should donate its take to charity.

George Stoitzev

1) 2) 3) 4) 5)

Law & Economics

Uber is a marketplace and Uber’s drivers are all independent agents. The majority of Uber fares go to these independent drivers Uber is commited to being a low-price leader Uber’s dynamic pricing affects less than 10% of all rides Uber is becoming more transparent.

AirBnB gives the hosts the ability to price according to their wishes. They give the hosts the ability to understand the market value of their property per night, and give the prices for comparable units. They don’t have as much price discrimination control as Uber does with its service. They allow the market to spontaneously adjust itself and achieve proper equilibrium. This is powerful because with the amount of transparency available a perfectly competitive environment for the betterment of all parties can happen. AirBnB allows the potential of a collection of individuals to organize in such a way that truly allows for Pareto efficiency. The characteristics of free market are enabled.

George Stoitzev

Law & Economics

Section 6: Combining the properties of Pareto Efficiency with both companies in regards to the progression of “value” created. By synthesizing the technological aspects that enable this progress, and giving rational as to why legislation will conform to the new standards once “value” has been demonstrated adequately. Pareto Efficiency is a state in which resources are allocated in such a way that one party cannot benefit without the other suffering. This state is attained by having a free market society with perfect information and no friction. This state of perfection is unattainable in the real world, but progress towards that ideals are possible with the addition of technologies integrated into disruptive companies like Uber and AirBnB. These companies have minimized the physical friction is areas such as peer-to-peer matching, GPS tracking, and Payment transactions. They have allowed for transparency, and empowered the individual to make transactions with his fellow man without the traditional burdens. These two companies have created services that facilitate the interconnectivity of physical flow of human activity. They have made enormous Pareto improvements and trampled existing legislation that created barriers to efficiency. These laws have been in place to protect large Oligopolies from controlling large aspects of activity. These traditional frameworks might have been necessary before the technological and social advancements, but they no longer serve their purpose. They are relics of the past that prevent Pareto Efficiency. These hinder the possibilities available with the integration of newfound technologies. They do not possess the potential to revolutionize the way in which we intereact with each other, and the data we need to truly make meaningful decision in accordance to economic efficiency. These improvements enabled by Uber and AirBnB come quantitatively. Uber and AirBnB provide competitive prices, and most times cheaper prices compared to other competitors. In addition to lower prices to customers, they enable the hosts and drivers to reap a larger share of the revenues. This monetary enhancement to both parties is possible because of the reduced “friction” and the exceptions to licenses and additional insurance. Qualitatively, Uber and AirBnB provide

George Stoitzev

Law & Economics

experiences that truly encapsulate the human ideals we strive for. These services bring us closer to each other as humans. They allow us to gain empathy for our fellow man, and explore his most personal spaces. (His home and car) These services are from our fellow man, they are not from larger corporations of hotel or taxi chains. They are our neighbors. This humanization coupled with added improvements in all areas of comfort, provides immense “value.” The public and government have become more and more cognizant of this immense “value” provided by these two companies. They have begun to change legislation on a city and municipality level. The government must provide what is in the best interest of its people. The people are becoming awaked to this possibility of having these amazing services. They are beginning to understand the benefits to themselves and their fellow man. They are beginning to understand what the current laws state, and why they should fight for the right to have innovation that creates Pareto Efficiency and “value” in all domains. Uber and AirBnB have, and will continue to influence the world we live in, in a positive manner. This is the beginning of major changes enabled by the exponential acceleration of technology. We have just reached the convex point, and will see improvements with each passing day.

George Stoitzev

Law & Economics

Section 8: Long Term Vision Uber and AirBnB are only a shell of what their truly capabilities will be in the future. Imagine a world that will be perfectly efficient. This world will improve the lives of all parties by reducing physical friction. This world that will allow you to express your creativity instead of dealing with the nerving hassles that serve to diminish that precious human capability. This world will be more empowering and abundant than even the best visions of Utopia.  If you think of Uber as a town car company operating in a few cities, it is not big.  If you think of Uber as dominating and even growing the town car market in dozens of cities, it gets bigger. (Data point: there are now more Uber black cars in San Francisco than there were ALL black cars before Uber started).  If you think of Uber as absorbing the taxi markets, it gets pretty huge.  If you think of Uber bringing taxis to parts of the world that did not have them before because of insufficient density, it gets even larger.  If you think of Uber as a personal logistics service that can drive your kids to school and back, take you to work, pick up your parents at the airport, drive you to date night so you can get your drinks on, it gets very very large.  If you think of Uber as delivering both people as well as things (packages, dry cleaning, groceries) it gets even larger.  If you think of Uber as a replacement for your car, it gets even larger.  If you mix in a fleet of self-driving cars, orchestrated by Uber, it grows again.  If you think of Uber as a giant supercomputer orchestrating the delivery of millions of people and items all over the world (the Cisco of the physical world), you get what could be one of the largest companies in the world. AirBnb and Uber have only just become revolutionizing our fundamental human needs (shelter and transportation) in a sharing economy. The Future is Here.

George Stoitzev

Law & Economics