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Uber And The Network

Summary

Uber is subsidized by taxes, labor and capital.

Apple and Uber are networks.

Apple strengthens their network, Uber does not.

Classical economics concentrated on supply, demand and price. Questions circled around quantity demanded and supplied and the impact on price. Current venture capitalists look for disruption of supply and the impact on demand and price. In classical economics labor was a component of price, in the Gig economy labor subsidizes the price. Instead of being constrained by supply-demand curves we live in an economy where certain disruptors are valued because of the ability to create a subsidized supply/artificial demand curve and monetize it before equilibrium sets in.

Classical economists designated two goods with surprising supply and demand curves as Giffen and Veblen. Both have demand increase as the price increases but for vastly different reasons. A Giffen good has demand increase because it is a necessary staple for low income consumers and is price increase lowers aggregate spending for the consumer so substitution to another good is compromised. If a family buys bread and meat daily and then bread increases in price, the meat may not be able to be purchased thus more bread is purchased.

The Veblen good is a luxury good that is priced based on status. As the price increases, consumers desire it more and pay up for the product.

Veblen goods have always been predicated on utilizing aspiration in order to entice the sale. Peer pressure to conform, jealousy, a false attempt at self-actualization and other psychological factors have been at the heart of luxury good sales. This also makes luxury goods some of the most profitable and resilient brands. Prior to Apple’s attention to detail and artistic touches, no one thought of personal electronics as a luxury item. Demanding about three times the cost of competitive products, Apple is a Veblen good. The iPhone price is subsidized by its distributor in the United States to create more demand because the phone companies use Metcalfe’s law to determine their own value. Uber demands to be known as a network and have a network valuation while its price is subsidized by its distribution which happens to be its labor. Apple generates extremely high margins from its higher price point while Uber loses money. Apple is a sub-category of a Veblen good we have named network-Veblen. The company has demand rise as the price point rises because a network is subsidizing the price.

While Apple allows the phone company to capture the value of the network effect, Uber plans on capturing the value for itself. In fact, Uber believes that as the quantity supplied increases through the density of drivers (nodes in a network), their costs will be lower, and margins will rise. Uber’s drivers experience what we call the Gig-Giffen pay effect because as the number of drivers in an area create more quantity supplied - the drivers will pay more to Uber to obtain the next passenger by accepting less and by working more time to earn their daily keep it reduces their ability to substitute a better job.

While psychology is used to sell Veblen products it is also used to recruit labor in the Gig economy. Pressure to conform, jealousy, a false attempt at self-actualization and other psychological factors are the recruitment pitch for labor to underprice their services for the aspirational Gig economy. Quantity supplied of labor increases as the cost of subsidizing increases. The more labor supplied to the market, the greater the cost of subsidy. Enter the Gig-Veblen labor economy.

As we have written before in Uber and the Surplus there are three factors subsidizing Uber; taxes, labor and capital. The company’s financial survival and health is dependent on capturing the network value. This is the difference between Apple and Uber. Apple has a motivated network that is increasing its value by subsidizing the iPhone. Uber has depleted capital and made labor unhappy as a result of subsidizing its growth.

Gig-Veblen is not network-Veblen. Apple strengthens its network partners, Uber weakens them.