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Why Uber drivers can't win: they're fighting supply and demand

Uber used to be a premium alternative to traditional taxi cabs. But as the market has grown more competitive, Uber has aggressively slashed fares. Today, an UberX ride can be cheaper than a conventional taxi in some metropolitan areas.

And many Uber drivers are furious about it. Because Uber takes a flat 20 percent of drivers' fares, the fare cuts have translated into pay cuts for drivers. On Wednesday, drivers in San Francisco and Los Angeles organized in front of Uber offices, accusing the company's white collar workers of getting rich while the drivers struggle to make ends meet.

Some of the drivers' complaints have merit. For example, Uber has offered some drivers help financing the purchase of a car to allow them to drive for Uber; imposing fare cuts on these drivers could cause serious financial hardship.

But fundamentally, fares — and, therefore, driver wages — are driven by supply and demand. Fares are falling because the market for taxi-like services is becoming more competitive. If Uber had maintained its previous high fares, it likely would have lost market share to Lyft or other competitors. Also, higher fares would have led customers to order fewer rides, which would have allowed Uber to employ fewer drivers.

And while Uber could — and perhaps should — reduce its 20 percent cut, this can only do so much to boost drivers' incomes. In both New York and Los Angeles, for example, Uber permanently cut fares by around 20 percent at the end of the summer. So Uber would have to reduce its share of fares to zero just to restore drivers' previous earnings in those cities.

In the long run, the  key question will be whether this market evolves into a de facto monopoly dominated by one company, or if it remains a highly competitive market with many ride-sharing services. If Uber eventually crushes its competition, then drivers might be able to organize and push for higher fares and higher pay.

But as long as the market remains highly competitive, these kinds of protests aren't going to do much. Uber already pays its drivers around 80 percent of the fares it collects, so there's limited room to give them a higher share. And competition from other companies makes it hard to raise fares.

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