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Will Uber Buy Me A Benz?

June 6th, 2019

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As consumers, we have said goodbye to hailing taxi cabs in the pouring rain. We have stopped stressing about public transit schedules and delays. Some of us have even found alternative solutions to a costly ambulance ride.

Instead, we just get an Uber.

Ride-sharing platforms like Uber and Lyft are one of the biggest ways people participate in what is known as the “sharing economy,” through which individuals share goods, like homes and condos on Airbnb and VRBO, or services, like labor and freelance work on TaskRabbit and Upwork.

For many, participating in the sharing economy as a consumer is freeing. But how have the suppliers—those who own cars or homes—been affected in the last decade?

Jing Gong, assistant professor of Management Information Systems at the Fox School, sought out the answer.

Consumer or consumed?

Using Uber as an example, Gong could see two sides of the same coin. On one hand, the demand side, consumers who use Uber might be more willing to give up their cars in favor of the convenience of temporary ownership, what she called the “cannibalization effect.”

On the supply side, however, Gong could also see that providers may have an incentive as well. Drivers—or those desiring to be drivers—may actually invest in their cars in order to capitalize on the income available in the sharing economy.

To discover the answer, Gong and her co-authors—Brad Greenwood, associate professor of Information and Decision Sciences at the University of Minnesota’s Carlson School of Management, and Yiping Song, associate professor of Marketing at Fudan University’s School of Management—investigated Uber’s entry into different cities in China. Using a unique dataset of new personal vehicle registrations between 2010 and 2015, Gong and her colleagues analyzed new car purchases compared to Uber’s introduction to the country starting in 2013.

Because Uber came to different Chinese cities at different times, the research team was able to use a statistical technique called difference in differences, which mimics a lab experiment, to compare groups classified as controlled or treated. As the platform rolled out, the team used variables in both geography and time to understand Uber’s effects compared to the control cities.

In the paper, “Uber Might Buy Me a Mercedes Benz: An Empirical Investigation of the Sharing Economy and Durable Goods Purchase,” the researchers found that both riders and drivers have become consumers.

“The consumption of Uber needs to be satisfied by more cars being available,” says Gong. “As more people are giving up on public transportation or car ownership, others are seeing the opportunity of becoming a driver, which in return calls for an increase in car sales and trade-ins.”

Entrepreneurs without red tape

The sharing economy has made way for entrepreneurs, sans the red tape.

Gong’s study found that Uber’s arrival to a city was correlated with an increase in new vehicle ownership—about eight percent on average. The researchers estimated that roughly 16 percent of new owners were purchasing their cars in order to become Uber drivers.

The effects were varied when the researchers analyzed key conditions. First, Uber had a stronger effect on the sale of smaller cars than larger cars, with owners placing a high premium on features like fuel efficiency. Second, women were less affected by Uber’s entry into a marketplace, but still experienced a significant increase in car ownership. Finally, young people were more significantly affected, given their higher likelihood to drive for ride-sharing platforms, change jobs, and have more volatile income.

Now, having a car or a home has allowed owners to see an opportunity for financial gain. For those who are unemployed or underemployed, ride-sharing has given them the tools and flexibility of a consistent income.

Effects from Detroit to D.C.

In this study, the researchers disprove a popular myth that Uber’s arrival has people fleeing car ownership. Knowing that buyers are now looking to purchase goods specifically for participating in the sharing economy, how should manufacturers react?

“In order for drivers to stay current while being cost-efficient, they are paying attention to the type of cars they are buying,” says Gong. “Whether it is for style or fuel economy, manufacturers are willing to market specific vehicles in order to draw in drivers.”

With Uber and other platforms, workers are bypassing the formalities of employment regulations. While lawmakers have highly regulated incumbents in the industries, like taxi companies and professional car services, startups have not had to contend with such high obstacles.

“Policymakers are having to reconsider whether this business model can sustain itself without intervention,” says Gong. She suggests lawmakers be thoughtful about reducing regulations on these established industry players to provide a level playing field.

A New Frontier

It is evident that platforms like Uber have changed the economic game faster than industries can keep up.

“The sharing economy is changing the landscape because it’s consumer to consumer,” says Gong. “The dynamics are different because the drivers are consumers of cars but the riders are also consumers of cars. With the manufacturers in the mix, there are more players.”

This research, the first of its kind to analyze the impact of the ridesharing economy on car owners, can provide insights to industries across the sharing economy. The introduction of Airbnb, for example, could encourage more homeownership for those looking to make money in new hot rental markets. Manufacturers of these goods will need to understand, build for, and market to these new customers.

Powered by new technologies and an entrepreneurial spirit, the sharing economy will continue to grow in both importance and prevalence. Yet, the question remains:

Is a new car—and gig—in your future?

This story was originally published in On the Verge, the Fox School’s flagship research magazine. For more stories, visit www.fox.temple.edu/ontheverge.

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