Market Power

Once the service is commoditized, platforms have the power to set the conditions for service provision, particularly the pricing conditions. Over time, many platforms have reduced the revenue per service paid to the transport service providers. This happened with bike riders working with Deliveroo in London in 20161 and has happened a number of times with Uber.2

Prices can be reduced as the result of increases in efficiency due to network effects. As the cost of the provision of the service is reduced due to its more efficient provision through the platform (reduction in waiting times, reduction in empty-runs and so on), retributions for each service can be reduced. Platforms have aggressively passed on such cost reductions to passengers as a way of improving the competitiveness of the services against other competitors (taxicabs, for instance), to increase ridership, and to trigger further network effects for the benefit of the entire ecosystem: the passengers, the platform, and even the service providers, which could end up making more money by charging less for each service, but increase the number of services.

When platforms are growing, they have an incentive to aggressively share such benefits with the users in order to grow the customer base. It is even common to sell below price in order to grow. At such initial stages of the platforms, they must provide attractive terms to service providers to ensure that demand and supply are balanced. Service providers might confirm that despite reductions in fees per service, the total revenue actually increases due to efficiencies in the provision of the service.

As platforms become more stable they still have a strong incentive to share the benefits more fairly across the ecosystem. Platforms in multi-sided markets would need to keep all sides satisfied. If payments to service providers are reduced too much, service providers will start leaving the platform, the balance between supply and demand will break, users will have longer waiting times, meaning they will contract fewer services and the entire ecosystem, and the platform itself, will lose. Such an effect has been described as the “second invisible hand” in the platform economy.3

However, winner-takes-all dynamics might exclude competition and the fair distribution of the benefits created by network effects. Platforms achieve a level of market power that allows them to behave independently of the rest of players in the ecosystem, imposing on them terms and conditions in such a way that the platform itself monopolizes the benefits derived from the network effects. While no transport platform has yet arrived at this point, this seems to be the case with more mature platforms such as Facebook and Google.

Will mobility platforms eventually reach the market power that Facebook or Google already enjoy? Certainly network effects create concentrated markets with an oligopoly structure. Under particular circumstances, network effects lead to monopolies. It is too early to determine whether this will also be the case of mobility platforms, but some indications can be provided.

On thin routes where the number of transactions is not very high and network effects can only be triggered when a high proportion of transactions takes place in the platform, monopolization is probable. This seems to be the case of BlaBlaCar in Europe. On an average route, the number of daily transactions is limited. Passengers demand a minimum number of options to ensure they meet their travel plans. Full network effects are only possible if a platform accumulates all the existing supply and demand. Smaller platforms can compete in very dense routes between large cities, but at a national scale, the largest platform will eventually monopolize the market. Under these circumstances, platforms can become natural monopolies.

In thicker routes, where the number of transactions is very high, platforms might exhaust network effects as they reach a percentage of transactions that can be replicated by other platforms. In San Francisco, for example, Uber’s scale is such that it can ensure that a driver can reach any passenger in less than one minute. If a second (even a third) competitor can reach the scale to replicate such level of service, there is room for competition. This seems to be the case, as Lyft has a substantial market share in a number of US metropolitan areas. Scale and network effects are always relevant, but they become exhausted at a certain point, so they can be replicated by more than one platform.

Thus, market power, and abuse of market power, will be among the fundamental debates around mobility platforms as they mature.

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