Subsidies for markets that scale

A common theme I've heard about Uber is that prices are artificially low due to venture capital subsidies. The thinking is, at some point these subsidies must end and prices must go up. The fear is that, by that time, no competitors will exist and consumers will lose out due to high prices.

But what if the cost of providing a ride will decrease in the future? How could it? The most obvious answer is self-driving cars. Other options include:

  • Add cars that seat more people, and share the cost of the driver
  • Enable drivers already headed to a destination, like work, to pick up passengers
  • Allow businesses to directly subsidize rides to their location. This already happens with happy hours and validated parking
  • Allow businesses to buy ads for people who haven't yet made up their mind

Each of these could reduce the cost per trip by 10% or more. From this point of view, offering cheap rides now is just a preview of low prices in the future. Put another way, it's kind of like taking out a loan to start a business where the first product you make is expensive, and each additional product gets cheaper and cheaper. If you can, best to start with the final price rather than get the reputation for overly expensive stuff.