George Stoitzev

Law & Economics

Current Legislation, and the potential for Pareto Efficiency from Uber and
AirBnB

Abstract: Understanding the dynamics of two major disrupting frameworks and

the ways in which they continue to shape the new law and economic landscape.
To do this, I analyzed the current laws, lobbied for by previous oligopolies,
showing the inefficient systems that cause increased friction between customer
and employee. I demonstrated methods, and technologies Uber and AirBnB use
to counter legislation, gather resources, and provide indispensible value to all
parties. By understanding the dynamics in place from all areas of study, I created
a framework from which one can determine the best course of action in
accordance with optimizing Pareto efficiency in terms of value. Value, in the
quantitative space, is the monetary outcomes of reducing friction between
parties. This is done by optimizing employee and customer creation, formation,
and transaction. Qualitatively, value is determined by methods of reducing
frustration while increasing overall satisfaction. By creating the framework of
truly optimal economic systems we can analyze how current laws fail, how Uber
and AirBnb succeed, and why progress is inevitable.

Introduction: The Internet, big data, and transparency have facilitated the
exponential growth of peer-to-peer marketplaces. The combination has taken
otherwise underutilized goods and services, which would be too cumbersome for
previous systems, and created frameworks that optimize Pareto efficiency from
an Economic and Social standpoint. Users rent rooms on Airbnb from their fellow
man instead of a corporation, and arrange rides from everyones private driver
with Uber. The interconnectivity has broken down barriers and increased
transparency, thereby increasing empathy and thus safety. By understanding the
otherwise hidden variables, fear is diminished; empathy for your fellow man
increases, and safety is achieved. Uber and Airbnb have utilized this newfound
individual assurance of their fellow man, and the accompanying technology that
enables this connectivity to optimize Pareto efficiency for the modern age. The

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value provided by Uber and Airbnb is evident, but laws created by the lobbying
of previous corporations and frameworks have created barriers in order to
maintain position and maximize profit. These laws, which are enacted to best
serve the people, need to be adapted in order to enforce what they were
originally created for. Government, for the people by the people, has a
responsibility to maintain a position for the best interest of its constituents. By
preventing technological frameworks from optimizing our society from a
economic and social standpoint we counteract the virtues we strive for.
This paper will provide an in-depth examination of the current legal
environment, and demonstrate the value created by Uber and Airbnb to justify
the adaptation of legislation. The value is derived from dynamic pricing, peer-to
peer exchange, and the reduction of physical friction.
Section 1 will provide the framework for understanding Pareto Efficiency, and the
ways in which it will by optimized through the technologies provided by Uber and
Airbnb, alongside the social landscape that enables such progress.
Section 2 will analyze the legal environment both domestically and
internationally. The section will primarily focus on the laws Uber and Airbnb are
circumventing, and the rational for doing so under the framework of Pareto
Efficiency.
Section 3 will discuss the economic and social landscape of the current state of
affairs. This section will demonstrate ways in which technological progression is
accelerating beyond the ability of governmental legislation adaptation. It will
describe how Uber and Airbnb have been enabled by our current society, and
how these disrupting companies have brought to surface the need for
governmental change in order to maintain growth and achieve Pareto Efficiency
in all domains.
Section 4 will give background to the leaders, and the mindset of this new breed
of venture capital backed technological companies. This section provides an indepth look at the tactics employed by these hungry entrepreneurial start-ups and
their progression into the mainstream. I will show how leadership, and company

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vision has provided laser-like goals no matter the obstacles. How venture capital
has enabled these companies to defy the norm, and why they are now too big to
ignore.
Section 5 will deal with the value that Uber and AirBnB provide. It will deal with
what needs they fill, and how these needs benefit all parties. How the technology
has enabled both companies to spur copycats throughout the world, and how this
technology has reduced friction in all areas. This reduced friction will be measured
quantitatively as well as qualitatively. Both areas will demonstrate why this new
framework has positive repercussions for the users, and society as a whole.
Section 6 will combine the properties of Pareto Efficiency with both companies in
regards to the progression of value created. It will synthesize the technological
aspects that enable this progress, and give rational as to why legislation will
conform to the new standards once value has been demonstrated adequately.
Section 7 Long term vision and Conclusion

1. Pareto Efficiency
Pareto efficiency is a state of allocation of resources in which it is impossible to
make any one individual better off without making at least one individual worse
off. Pareto efficiency makes no statement about equality. In an idealized free
market scenario there are no externalities, all markets are in full equilibrium,
markets are perfectly competitive, transaction costs are negligible, and market
participants have perfect information. According to the Greenwald-Stiflitz
Theorem perfect information is vital. This theorem states that any competitive
equilibrium leads to a Pareto efficient allocation of resources. It is an analytical
confirmation of Adam Smiths invisible hand. It is important to note that
becoming Pareto efficient requires perfect information.
Perfect information in the real world is impossible. The amount of information
present, combined with the human inability to biologically comprehend all
information to make the best decision is inevitable. Friedrich Hayek emphasizes

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Law & Economics

that society has become specialized to an unimaginable degree, and that the
inability to synthesize all areas is what leads to creating an inefficient
governmental system. He argues in his Magnus Opus, that a Spontaneous Order
from the free market can progress towards our economic ideals. That we must go
against our natural tendencies to manage in a governmental stance in order to
achieve what we try to achieve through management. To achieve the idealized
perfection of information may not be possible through any one individual, or
perhaps collectively through the free market, but progress is possible.
Internet, cloud storage, and big data have enabled interconnectivity on an
incomprehensible scale. Transparency in all areas has brought about the
possibility to achieve a Pareto Efficient society we strive for. In todays society we
have the power to understand the dynamics of things previously hidden. We can
see through the eyes of others. We can see the personalities through the
collection of all that they are. Through the analysis of their social network, their
entertainment, and their courses of study, all of us have the potential to
understand one another. As we understand one another we begin to gain
empathy. This empathy reduces the fear and anxiety in the presence of otherwise
strangers. We have been engrained with the evolutionary capability to empathize
and be altruistic, but within our tribe. This modern tribe has been extended
virtually to the entire world, and with that power we can achieve wonderful
things for the betterment of all. We can achieve a Pareto Efficient system of
allocation.
Uber and AirBnB have understood this new trend of social communication. They
have implemented their technologies to enable the increased empathy of man in
two areas. AirBnB have allowed anyone to host another in their private home.
Uber has allowed anyone to drive another in their private car. The
understanding of your fellow man, provided by the interconnectivity of the
internet, has mitigated fear and enabled safety. With this social and technological
progression these two major companies have created frameworks to achieve
Pareto Efficency and provide immense value to all parties.

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Law & Economics

The frontier line is demonstrative of Optimal Pareto Efficiency. It is the perfect

allocation of resources. This is impossible in the real world because of the
inability for mathematical perfection, but the gap could be closed upon. These
imperfections are a result of rigidities. By embracing technology, Uber and Airbnb

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Law & Economics

have created value through the minimization of friction and the maximization
of human and capital resources. As we become more Pareto Efficient it becomes
more probable to achieve a state of increasing relative inequality. This
transparent inequality creates social uprise over fairness but is mitigated by
an overall shift is TOTAL VALUE. Those factors of justice and fairness, as
expounded by Friedrich Hayek, should not prevent Pareto Efficiency, because
doing so would render society worse off in the long run.
Section 2: Legal Environment
The legal environment that Uber and AirBnB operate under varies from
municipality, city, state, country, to continent. The governmental disfunction
stems from a previous generation not bounded by the interconnectivity of
information, and interaction. It has lagged behind as technology has accelerated
beyond the capabilities of governmental adaptation. This dichotomy has resulted
in inefficiencies, confusion, and friction. Governmental legislation can no longer
properly perform its function, which is to provide what is best for its
constituents. This inability, highlighted by Hayek, has been illuminated these past
couple years, and major change to the fundamental framework must take place in
order to achieve the virtues we strive for as a human species.
Although there are thousands of discrepancies between the interactions of
these laws, major commonalities are found. For Uber and AirBnB the problem
rests on not operating with the same insurance, and licenses that the traditional
services require. This circumventing of physical friction allows both companies,
and its employees and customers to receive a far superior product and service in
accordance to Pareto Efficiency and value creation. Uber operates in virtually
the same capacity as the taxi cab industry, and AirBnB operates as a short term
rental space in the same manner of hotels. The argument by both companies is
that it doesnt. It doesnt because the traditional laws dont apply to their case.
They are not the taxi industry, and they are not the hotel industry. These are a
special case not yet understood and accounted for by current legislation. The
discrepancy comes from the fact that Uber does not own the cars, or
employee the drivers. AirBnb does not own the location shapes, nor does it

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Law & Economics

employee its clients. These companies are merely facilitators of agreements.

They operate under the notion of achieving the ideals of a free market society.
Where there is perfect information, supply and demand equilibrium, and reduced
friction. By owning any part these companies would lag behind, and be
unable to focus on their role. Their role is to help achieve Pareto Efficiency by
focusing their efforts on utilizing technology to allocate resources optimally.
Jurisdictions around the world have issued Uber and AirBnB cease-and-desist
letters, and threats of lawsuits. These obstacles have been responded to, mostly,
by ignoring the issue. Innovations in technology that threatens the current
legislative system, lobbied for by previous corporations, have always been met
with opposition. This natural occurrence should not deter innovation that creates
value and improves society as a whole. The barriers have been quite literally
run over by these venture backed companies. Uber and AirBnB now have not
only proven their value creation, but also have the capital and arsenal to battle
any form of obstruction. These Venture backed companies have the resources to
revolutionize the world in which we live in. Companies throughout the world have
taken the technology from Uber and AirBnB and replicated its service in their
respected area. To give some perspective, reports say Uber is raising capital at a
40 Billion dollar valuation. That is 40x the valuation just 18 months ago. AirBnB is
valued at 13 Billion. These companies are both 6 years old. This war chest of over
1 Billion in liquid M1 allows them to expand and dominate their respected
industry.
The Social Economy Pyramid: Years to Reach $10 Billion Valuation Mark

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Law & Economics

The issue rests on liability. As private consultants the companies contest

that the liability outside of the service they provide is on the individual. They are
not employees, nor is their property owned by the companies. The traditional
legislative mold needs to adapt to the modern ecosystem, and be cognizant of the
value created by these two disrupting companies. The taxi-cab oligopoly and the
huge barriers to entry that come with the hotel and taxi industry prevents
innovation that provide value to all parties. These oligopolies are rooted in the
physical domain, and as a result have friction present that prevent Pareto
Efficiency. The fixed supply of taxis in major cities, alongside the fixed price
creates friction. This friction is not as present in the hotel industry because of
accompanying technology that creates matches. These companies like Kayak,
Priceline, etc provide immense value to the hotel industry, but AirBnB operates in
a parallel industry. They are the Bitcoin of the traditional short term rental space.
They have enabled a true peer-to-peer market based on private property on a
global scale and merely facilitated transactions. This peer-to-peer marketplace
needs to adequately match and connect parties in very time and location
sensitive arenas. That is the function of these software companies. They take
resources and capital and allow them to reach Pareto Efficiency.
As for regulations for Livery Vehicles, It is unlawful for any person to drive a public
passenger vehicle equipped with a meter which registers a charge of any kind.
Chicago Muni. Code 9-114-060.Livery Vehicle means a public passenger vehicle
for hire only at a charge fixed by agreement in advance. Chicago Municipal Code
9-114-280.
In Chicago, under local ordinance, it is unlawful for any person other than a livery
licensee or his agent to represent to the public that he renders livery service. Chi.
Muni. Code 9- 114-020 (c). Additionally, in Chicago, no dispatch service may serve
both taxicab and livery license holders. City of Chicago Rules and Regulations for
Radio Dispatch Services Rule No. 3.
This is the Yellow Group lawsuit against Uber using the Lanham act. A party is
liable under 43(a)(1)(A) and (B) of Lanham Act, for: (A) false representations
concerning the origin, association or endorsement of good or services through the

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Law & Economics

wrongful use of anothers distinctive mark, name, trade dress or other device (B)
false representations in advertising concerning the qualities of good or services. A
party bringing suit under Lanham Act must assert a discernible competitive injury.
Without an injury, plaintiff lacks standing. Uber invokes Marvellous Day Elec. (S.Z.)
Co., Ltd. v. Ace Hardware Corporation. Uber is on different level of distribution
chain Plaintiffs include taxi licensees, taxi affiliations, and a livery service. Uber
is a software company and a licensed radio dispatch service and, as such, puts
members of the public seeking transportation in touch with licensed taxi and
black car drivers.
Whether Uber has violated any municipal regulations is an issue squarely for
agency consideration and resolution.Because agency decisions are frequently of
a discretionary nature or frequently require expertise, the agency should be given
the first chance to exercise that discretion or to apply that expertise.Agencies
such as Chicago Department of Business Affairs and Consumer Protection should
interpret or write new rules.
Ubers basic argument is that they are different from a taxi company, and on a
different level of the distribution chain. Thus, you cannot sue under Lanham Act.
We are so different, that regulatory bodies do not know how to apply their
existing municipal regulations to Uber. Thus, agencies need to rewrite their
regulations.
Uber have understood the role they must have in politics in order to achieve
acceptance in both the local and federal level. They hired David Plouffe, Obamas
campaign manager and a political stratagest, in order to lead teams into the
political landscape. Uber has to convince legislators and the public that their
service is providing immense value to all parties, and making society better off
from their efforts. That the issues of insurance and licenses are not the same as
traditional systems, and that they must be adapted to better suit this modern
environment.
David Plouffe said,
Uber has the chance to be a once in a decade if not a once in a generation
company. Of course, that poses a threat to some, and Ive watched as the taxi

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Law & Economics

industry cartel has tried to stand in the way of technology and big change.
Ultimately, that approach is unwinnable. But I look forward to doing what I can
right now to ensure drivers and riders are not denied their opportunity for choice
in transportation due to those who want to maintain a monopoly and play the
inside game to deny opportunity to those on the outside.
I could not be more excited to join such a vibrant company and its people who
will be at the absolute leading edge of tomorrows innovations and changing
peoples lives and their cities for the better. It will be a privilege to jump in the
foxhole with the team at this great startup and get to work.
Uber has run into some controversy after an executive told reporters he should
hire to find dirt on the journalists reporting potentially damaging claims.

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Law & Economics

This summary details ways Uber and AirBnB deal with regulatory
objections raised in select jurisdictions around the world.

appealing directly to the relevant authority to change the regulation

pressuring the local community to appeal to the relevant authority

temporarily or permanently withdrawing the product from the market

changing the product to comply with the regulation

challenging the regulation in court, and in some cases continuing to engage in

the challenged conduct, or

paying fines while continuing conduct that contravenes the regulation

The last two cases may be why it appears that Uber and AirBnB are continuing to
operate despite the law.
The Singapore government has responded to the rise of Uber, GrabTaxi and other
new taxi-app services by introducing new regulations (published a few days ago
on Nov 21, 2014) through the Land Transport Authority (LTA) effective Q2 2015:
These regulations have come about after a year-long consultation with various
groups: commuters, the National Taxi Association, third-party taxi booking
services and taxi companies.
They'll require registration of services, provision of customer service, capped fees,
licensed taxis and drivers.
The effective change makes these taxi apps operate just like regular taxis: no pretrip tipping, not allowing pre-specified destinations, etc.
Part of the reason is consumer safety and interests, especially to allow them to
remain equally accessible to all members of the public, and prevent choosy
drivers.
The LTA is giving enough time (more than 6 months) for these taxi services to
become compliant to these new regulations.

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Law & Economics

For Airbnb, both the Housing Development Board (HDB) and Urban
Redevelopment Authority (URA) have specific regulations and guidelines against
short-term rentals under 6 months.
The reasons given are that "HDB flats are meant for owner-occupation" and
"majority homeowners prefer to retain the residential nature of their properties.
Allowing residences to be used for short stays leads to high turnovers of
occupants, and gives rise to nuisance and safety concerns."
Enforcement of these regulations have not been done against Airbnb but against
the homeowners who list their properties on these sites.
Both the HDB and URA encourage "feedback on any suspected cases of
unauthorized subletting" by any member of the public.
Over the past few years, they've been investigating hundreds of complaints and
violations of this sort, resulting in many warnings. Penalties and confiscations
Singapore is an immense adaptive society that will have major implications for
legislation around the world. San Fransisco have recently passed the Airbnb
law.
The law allows only permanent residents to offer short-term rentals, establishes a
new city registry for hosts, mandates the collection of hotel tax, limits entirehome rentals to 90 days per year, requires each listing to carry $500,000 in
liability insurance, and establishes guidelines for enforcement by the Planning
Department. The measure, which passed 7-4, is slated to take effect in February,
2015. Chiu ( Board president) and other supervisors said they sought a balance
between preserving affordable housing by making sure landlords cant convert
permanent units to more-lucrative vacation rentals and allowing residents to
earn extra income by renting to travelers. We can protect our citys housing units
from being converted to hotels, while also allowing short-term rentals on a
limited basis to help residents afford to stay in their homes, Chiu said in a
statement after the vote.

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Law & Economics

Airbnb has said it will start collecting and remitting the hotel tax this month,
something Chiu said was spurred by his legislation. It should bring at least $11
million a year to city coffers.
In New York Mr. Schneiderman (New York Attorney General) and city regulators
will also announced a joint enforcement initiative to shut down illegal hotels.
Various regulators will investigate violations of building and safety codes and tax
regulations.
Anyone operating an illegal hotel should be on notice that the state and city will
take aggressive enforcement actions in this area, said Mr. Schneiderman. A slick
advertising campaign doesnt change the fact that this is illegal activity.
AirBnB has grown to enormous levels in major cities, and to completely eradicate
this service is impossible at this point. Mr.Schneiderman claims that 72% of
these rentals are illegal. The claim is based on the fact that 6% of hosts make 37%
of the revenue. There are currently 35,354 unique places in New York. This huge
discrepancy demonstrates that the Airbnbs claim that it, allows longtime
residents to stay in their homes by earning just a little extra money to help make
ends meet, is wrong. Individuals are acting as de facto hotels without the added
regulation, licenses, and taxes. These claims seem to be accurate, and are
demonstrative of the Pareto claim that 80% of the results are from 20% of the
inputs. These are natural occurrences, but ones that have been turned into
reasons to restrict certain forms of the service. New York has yet to completely
institute a new law, or enforce its legislation so the next few months should be
interesting.
Section 3: Economic, technological, and Social Landscape
Todays modern global society has been enabled to flourish by the
interconnectivity of the internet. This informational transaction does not garner
the same physical constraints of the previous model. Allowing connectivity to take
place on this global level binds us together. With this bonding we can exchange
information and ideas to create something previously impossible. We know have
the potential to access all of histories ideas at our fingertips. We can

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communicate across the world in real time. We can crowd fund our individual
ideas and gather capital from a diverse group of people. We can transmit
monetary value, and understand ourselves through the understanding of others.
Payment transaction and accurate GPS is invaluable for Uber. They rely upon this
as the foundation for their service. In order to provide the immense value to
customers and drivers they must minimize friction. This friction comes in the form
of slow transactions from traditional frameworks. The taxi industry still relies on
cash, and since they dont have a centralized framework they scower for
customers. This scowering wastes time for both the driver and the customer. This
wasted time is translated in wasted capital. The coordination is cumbersome
compared to Ubers technology. Uber coordinates the parties, they reduce
physical friction, and provide efficient communication. They use Garmin for GPS,
Realtime/dispatch systems are built on Node.js and Redis. Business logic all lives
in an API built on Python, MySQL and Mongo. Crazy math and science for ETAs,
demand and supply prediction is also done in Python. Websites, including large
code bases for internal operations and partners/drivers, are on Backbone.js.
Objective-C and Java for the iPhone and Android apps.
The technological stack used by these innovative companies have enabled them
to revolutionize the flow and reduce friction. This improvement in all areas
enabled by software and data has created services that are Pareto Efficient. All of
these improvements and changes in the social landscape must have happened in
order for these companies to be as influential as they are today. This 0 to 1
change is really a 1 to N if analyzed further. Everything is building on top of one
another and shifts horizontally happen when all the pieces come together to
create something innovative.
By utilizing the ability to gather greater amounts of resources, human capital, and
information we can create immense value that can be shared. This is
demonstrated in concerts, buildings, airplanes, and ironically the internet. We
gather and create something majestic that cannot be created by any one
individual, but that can be equally shared once created. This utilization of a mass
of potential creates things impossible without the joint effort of a global society.

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Bonding Capital: formation of strong ties. There is a high degree of

homogeneity, as individuals tend to reinforce shared practices, norms and
similarities.
Bridging Capital: formation of weak ties. This power comes from the ability to
facilitate trust by providing transparency into the credibility of individuals.
Linking Social Capital: formation of links between vertically/horizontallyseparated groups. This is the transaction and value-capture side of the equation.
Uber and AirBnB have taken the technology present, and combined it on a global
physical level. They have taken the online interconnectivity and used it to

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Law & Economics

allocate resources on an otherwise physical domain. They have created value by

making the system Pareto Efficient. They reduced the friction of matching supply
with demand on strictly a peer-to-peer plane. This sharing economy has the
potential to maintain the advantages of having private property with the added
benefit of sharing underutilized resources. The optimization of private property
and Pareto Efficiency is what Uber and AirBnB is striving for.
Low-Cost Producer. The incumbents high fixed cost structure (which provides
them with process and scale cost advantages) is becoming a competitive
disadvantage as many travelers have grown tired of the impersonal experience of
staying in cookie-cutter hotels and the inefficient and impersonal experience of
traveling in taxis. In comparison, Social Sharing companies such as Airbnb and
Uber are the ultimate low-cost producers as they have close to a zero marginal
cost model as they have the potential to create infinite supply by empowering
individuals to generate income from under-utilized personal assets (i.e. Property,
Plant, & Equipment such as a house or car and Human Capital such as property
management or chauffeuring services).
High-Switching Costs. Customers are no longer held captive to the incumbents
as Airbnb and Uber now present more attractive and personal alternatives.
Intangible Assets. The value of a brand name is depreciating as Airbnb and
Uber are creating Long Tails in travel by replacing artificial institutional trust with
Social Capital by democratizing the tools of production and distribution and
connecting supply and demand by capitalizing on the filtering efficiency of social
network reviews and facilitating trust through dual accountability systems (i.e.
both the hosts and the guests rate each other).
Network Effect. Unlike hotel and taxi companies that seek to constrain supply
to keep prices high, Airbnb and Uber are creating structural assets that appreciate
in value as they attract more and more new hosts/drivers (i.e. supply) and
travellers (i.e. demand) to their platform, leading to the ultimate network effect.
Current legislation around the world is preventing innovation to take place.
Governmental persecution of radically different frameworks, that maximize

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Pareto efficiency, in order to maintain the status quo should be eradicated.

Spontaneous Order in the manner that Hayek idealized would allow the free
market to truly function properly. The issue of allowing the free market to flourish
without governmental interference is that there could be incidence where there
could be irreplicable harm that is non-localized. This threat to the immediate
safety of humanity should be cause for alarm, but the current system of
governmental legislation is preventing beneficial value to be created from the
new technology being created. This technology which is accelerating at an
exponential rate has crossed the point in which it competed with government for
control and rules. From this point on traditional government is in a position where
it cannot adapt to the universal landscape shaped by technology. Change must
take place on this manner as well. Although this manner is immensely complex,
government can allocate their focus on enforcing the precautionary principle on
manners that are non-localized. These include Global Warming, GMO and
monoculture, and cryptography security.
Section 4: Leaders and Mindset
The leaders of both companies come from the original founders. Travis Kalanick &
Brian Chesky both tied for #1 on the year end countdown of the most influential
people in Fortune Magazine. As serial entrepreneurs in Silicon Valley, they had
influence and access to many influential individuals that can mentor and shape
their companies into what they are today, and what they could eventually be.
Their efforts in utilizing emerging technologies to explore markets, not yet
created, is enormous. They paved the way for a multitude of other companies to
follow their footsteps and utilize their model for markets ranging from laundry
(Washio), to building ikea products (Taskrabbit), to delivering takeout (Grubhub).
These two founder and CEOs clashed heads with the existing laws, fought hard to
demonstrate the economic worthiness of their service, and became a beacon for
positive change. They hustle and operate under the determination of a small
start-up. They consider themselves the underdog even though they have huge
valuations, because they see the vast potential to be a global leader. They have
had many competitors that threatened their stance, but ruthlessly did everything
in their power to be the leaders. They innovate with each passing day,

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implementing services that benefit all parties. They understand the long-term
potential if they provide the most value. They understand that the service they
provide must be orders of magnitude better than the nearest competition. They
continue to hire incredible talent, improve algorithms and methodology, and
reorganize structure to maximize efficiency and create value through less friction.
Airbnbs mission is to unlock unique spaces worldwide and infuse a sense of
belonging and home into each destination. The spaces are more than just a place
to sleep for a few nights, they are places that tell the story of the individual living
there. Their favorite coffee shop, their personality, and their sense of style is
infused within their home and location. This creates an atmosphere that bonds
each other together. Understanding your fellow man on a more in-depth level is
the key towards empathizing and feeling secure. Uber aims to attain the same
form of capital through its service. UberX is a way of personalizing the experience
of getting to your destination. The drivers are humanized, and the vehicles are
regular cars. This allows the atmosphere, alongside the payment system, and
matching system to ease both parties. This experience is further enhanced once
realizing that UberX is roughly 20% cheaper than Taxi. This value created by
both companies makes attracting and keeping customers and clients come
naturally.
Section 5: The Value Uber and AirBnB provide
Uber is a mobile application which connects passengers to willing, private drivers
who pick them up and drive them where they need to go, much like a taxi service.
Uber itself earns revenue by taking a 20% cut of fare cost. The taxi market
currently is an oligopoly in the sense that it has laws in place with constrict the
availability to enter into the market. The typical taxi licenses are enormously
expensive for an average individual to own outright. This high barrier to entry is
characterized by monopolies and is prelevant in the taxi industry throughout the
world. This traditional system is not as efficient as Uber, and creates tension from
creating any Pareto efficiency from the rigidness. This fixed supply and price
creates unnatural friction that bleeds into optimization.

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Uber has entered the market whether or not it is legal of them to do so under
current laws. They have side stepped many of the barriers, and eliminated the
need to purchase a license. This caused many individuals to seriously consider
Uber as an outlet to enter because of the accessibility, pay, and freedom of work.
The emergence of other similar spawns to Uber came as well. These services such
as Lyft and Halo battled to undercut each others prices, and create incentives for
both consumers and drivers. They entered into almost a perfect completion, but
that also featured dirty tactics like poaching drivers, and manipulating each
others services. They had the liquid capital to subsidize the potential for short
term profits for long term domination.
In the picture below is the comparison of the two Silicon Valley companies that
battled for control. Although they are similar they have experiences that are
somewhat different. Lyft is more casual and spunky than Uber. Lyft makes the
drivers place a pink mustache on the front of the car, and the drivers dont have
any dress codes. They are truly just your average people making calls and driving
people around. Uber and even UberX is more sophisticated, but still casual. They
have some dress codes and some vehicle codes, but try to uphold an experience
that is more than just your average person driving you around. They still maintain
the friendly atmosphere, but have a touch of modern ambiance imbued within
their service. The amount of funding and valuation size is dramatic. This has
enabled Uber to expand more rapidly both domestically and internationally, and
bring additional incentives to both parties in order to get them within their
framework. They aim to bring people on board and have them view Uber as their
primary source of transportation. They want to eradicate Lyft, and give them no
potential for profitability in this considerably low margin business.
Currently Uber is flooding the market in India and China with extremely low cost
options compared to copycat competitors. Uber is willing to take 50% loses on
certain journeys in order to gain loyalty, and establish themselves as the leader in
the future. They are hemorrhaging cash into these markets with the capital these
gained from investments at an increasing high valuation levels. (40 Billion as of
latest news, 18 billion only a couple months ago)

George Stoitzev

Law & Economics

This is an example in game theory called the Bertrand game, where two firms are
constantly bidding prices down in order to attract market share until they reach
the zero economic profit condition. Furthermore, as more companies begin to
enter this taxi market we can even see more characteristics of perfect
competition. This diagram below features the price war of Best Buy and Amazon.
These companies are willing to reach the point of marginal cost in order to take
away market share and become dominant. They are sometimes even willing to go
below this point and subsidize the products or services in order to draw the other

George Stoitzev

Law & Economics

out of business. These tactics are focused on the long-term potential of being the
leaders in the market. By reducing the short term profits in this small subsection
they can capitalize in the long-term in areas of higher profitability. They solidify
themselves as the leaders which provide the most value to the customer, and as
such receive loyalty on anything else they produce. It is important to note that
this is becoming possible because of the change in perception of the public and
the accessibility of capital resources. They resources come from venture
capitalists who understand the potential of using these methods in order to
convince the public when it comes time to IPO.

George Stoitzev

Law & Economics

The simplicity of the UI and UX on both the driver and customer front-end allows
Uber to dramatically reduce friction from the inability to properly utilize their
technology. By creating this simplistic both parties can achieve what they set out
to do without the unneeded hassle. The back-end of this incredibly powerful
service is dramatically more complex, which allows for properties to be integrated
in the future. These future advancements will not only help achieve Pareto
Efficiency, but will shift the whole curve forward by creating value.
Another key feature of Uber which has intrigued economists is the concept of
price surging. Ubers business model represents one of the most basic principles
of economics: increased demand raises prices and allows supply to expand. One
example of this is during a snowstorm in New York in December 2013. The road
conditions were terrible and there was a deficit of usual yellow taxis, leaving
many stranded. In this instance, Uber increased its fares up to six fold. While
many customers have labeled this as price gouging, it achieved its intended
effect of incentivizing drivers to hit the roads and meet the demand willing to pay
these prices. This phenomenon is so intriguing because unlike many markets,

George Stoitzev

Law & Economics

demand and supply adjustments are made instantaneously. Although this is not a
perfect bidding market, but rather algorithm based pricing, its still fascinating to
see information immediately reflected in prices.
Uber has slashed it Uberx prices by 20% and agreed to cap prices during
emergencies in New York.
This policy intends to strike the careful balance between the goal of
transportation availability with community expectations of affordability during
disaster UBER CEO argued.
New York law prohibits price gouging in order to provide consumers with critical
protections to which they are entitled under the law. The latest legislation
reached an agreement with Uber on preventing price gorging during emergency
situations. This does not affect much considering the percentage of these
emergency situations in remarkable low. The effect is negligible, but the Uber
looks better and the public is happy for this little nugget.
This picture demonstrates the UI shown to
customers when faced with the decision to go
through with surge pricing. This incredible
transparent system of notifying customers is
now under fire. This is primarily because the
public is not used to being notified in this
manner. Other industries that utilize the
abilities of price discriminations to manage
supply and demand, and capture the most
profit from different demographics arent as
transparent. This has been a reason for Ubers
ban in Las Vegas and its controversy in Main
Stream media. This overcompensation will
cool as understanding deepens.

George Stoitzev

Law & Economics

George Stoitzev

Law & Economics

Regulations for Taxis: Taxis are not permitted the luxury of doubling, tripling, or
even quintupling their rates as Uber does, just because it is raining or a holiday.
Chicago Municipal Code 9-112-600.Rule TX05-07(c)(2) specifically prohibits a
licensee from imposing on a consumer an extra fee or surcharge for using noncash electronic forms of payment. It is unlawful for any person to demand or
collect any fare which is more than the rates established by ordinance. Uber does
not have to abide by these rules since it is not considered a taxi service.
Overall, the case of Uber is truly a fascinating one from an economic standpoint. It
showcases the power increasing technology has in transforming markets and
equipping consumers and suppliers with information. Perhaps the most incredible
aspect is the fact that in the case of Uber these economic concepts and changes
appear quickly right in front of our eyes.
Price discrimination is prelevant in many fields like the movies, or airlines.
Dynamic pricing in the more rigorous sense was pioneered by The CEO of
American Airlines (Robert Crandall) in the 1980s. He saw this as a way to fight off
competition from discount airlines like People Express, while keeping prices for
tickets brought closer to takeoff as high as possible. This yield management has
become integral in the business models of hotels, and rental-car companies, and
can be fully Pareto efficient with increase in data and analysis.
Technology has made it easier to segment the market and change prices based
upon many variables that are invisible to the average consumer. These include
crawling your search history, your social media, and your recent purchases.
Uber has taken some slack partly because they were not as transparent about
their price gouging to consumers straight away. Ironically, once they did they left
many angry of even being charged higher for popular hours. The need for
honestly and transparency is very important to the Western world, and
paradoxically can ease the slack from those that commit wrongs. The fact that a
wrong has been committed could be subdued with telling the truth. This is Pareto
Efficient because we dont have to allocate resources to find the truth.

George Stoitzev

Law & Economics

The traditional taxi service was fixed and couldnt efficiently price discrimination
both because of the law, and because of the inability to gather meaningful data.
The dynamic pricing structure Uber utilizes is beyond the normality typically
associated with this service, and the fact that there is no discount in this pricing
makes the distasted that more palatable.
The DEEP irony here is that Uber offers the most economically sensible, and
useful, example of dynamic pricing in the economy.
Although this can be viewed as squeezing every possible dollar from customers
it can also be viewed as creating equilibrium in the supply and demand of the
service. The first texted dynamic pricing in Boston in 2012 increased on-the-road
supply of drivers by 70-80%.
The company itself should take no money during surge periods (it now takes 20
percent of every fare), so all the money goes to the drivers. Or it should cap prices
to consumers but pay the higher price to drivers, essentially subsidizing peoples
rides in surge periods. Or when prices rise really sharply, Uber should donate its
take to charity.

George Stoitzev

1)
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Law & Economics

Uber is a marketplace and Ubers drivers are all independent agents.

The majority of Uber fares go to these independent drivers
Uber is commited to being a low-price leader
Ubers dynamic pricing affects less than 10% of all rides
Uber is becoming more transparent.

AirBnB gives the hosts the ability to price according to their wishes. They give the
hosts the ability to understand the market value of their property per night, and
give the prices for comparable units. They dont have as much price
discrimination control as Uber does with its service. They allow the market to
spontaneously adjust itself and achieve proper equilibrium. This is powerful
because with the amount of transparency available a perfectly competitive
environment for the betterment of all parties can happen. AirBnB allows the
potential of a collection of individuals to organize in such a way that truly allows
for Pareto efficiency. The characteristics of free market are enabled.

George Stoitzev

Law & Economics

Section 6: Combining the properties of Pareto Efficiency with both companies in

regards to the progression of value created.
By synthesizing the technological aspects that enable this progress, and giving
rational as to why legislation will conform to the new standards once value has
been demonstrated adequately.
Pareto Efficiency is a state in which resources are allocated in such a way that one
party cannot benefit without the other suffering. This state is attained by having a
free market society with perfect information and no friction. This state of
perfection is unattainable in the real world, but progress towards that ideals are
possible with the addition of technologies integrated into disruptive companies
like Uber and AirBnB. These companies have minimized the physical friction is
areas such as peer-to-peer matching, GPS tracking, and Payment transactions.
They have allowed for transparency, and empowered the individual to make
transactions with his fellow man without the traditional burdens. These two
companies have created services that facilitate the interconnectivity of physical
flow of human activity. They have made enormous Pareto improvements and
trampled existing legislation that created barriers to efficiency.
These laws have been in place to protect large Oligopolies from controlling large
aspects of activity. These traditional frameworks might have been necessary
before the technological and social advancements, but they no longer serve their
purpose. They are relics of the past that prevent Pareto Efficiency. These hinder
the possibilities available with the integration of newfound technologies. They do
not possess the potential to revolutionize the way in which we intereact with
each other, and the data we need to truly make meaningful decision in
accordance to economic efficiency.
These improvements enabled by Uber and AirBnB come quantitatively. Uber and
AirBnB provide competitive prices, and most times cheaper prices compared to
other competitors. In addition to lower prices to customers, they enable the hosts
and drivers to reap a larger share of the revenues. This monetary enhancement to
both parties is possible because of the reduced friction and the exceptions to
licenses and additional insurance. Qualitatively, Uber and AirBnB provide

George Stoitzev

Law & Economics

experiences that truly encapsulate the human ideals we strive for. These services
bring us closer to each other as humans. They allow us to gain empathy for our
fellow man, and explore his most personal spaces. (His home and car) These
services are from our fellow man, they are not from larger corporations of hotel
or taxi chains. They are our neighbors. This humanization coupled with added
improvements in all areas of comfort, provides immense value.
The public and government have become more and more cognizant of this
immense value provided by these two companies. They have begun to change
legislation on a city and municipality level. The government must provide what is
in the best interest of its people. The people are becoming awaked to this
possibility of having these amazing services. They are beginning to understand the
benefits to themselves and their fellow man. They are beginning to understand
what the current laws state, and why they should fight for the right to have
innovation that creates Pareto Efficiency and value in all domains.
Uber and AirBnB have, and will continue to influence the world we live in, in a
positive manner. This is the beginning of major changes enabled by the
exponential acceleration of technology. We have just reached the convex point,
and will see improvements with each passing day.

George Stoitzev

Law & Economics

Section 8: Long Term Vision

Uber and AirBnB are only a shell of what their truly capabilities will be in the
future. Imagine a world that will be perfectly efficient. This world will improve the
lives of all parties by reducing physical friction. This world that will allow you to
express your creativity instead of dealing with the nerving hassles that serve to
diminish that precious human capability. This world will be more empowering
and abundant than even the best visions of Utopia.
If you think of Uber as a town car company operating in a few cities, it is not
big.
If you think of Uber as dominating and even growing the town car market in
dozens of cities, it gets bigger. (Data point: there are now more Uber black cars in
San Francisco than there were ALL black cars before Uber started).
If you think of Uber as absorbing the taxi markets, it gets pretty huge.
If you think of Uber bringing taxis to parts of the world that did not have them
before because of insufficient density, it gets even larger.
If you think of Uber as a personal logistics service that can drive your kids to
school and back, take you to work, pick up your parents at the airport, drive you
to date night so you can get your drinks on, it gets very very large.
If you think of Uber as delivering both people as well as things (packages, dry
cleaning, groceries) it gets even larger.
If you think of Uber as a replacement for your car, it gets even larger.
If you mix in a fleet of self-driving cars, orchestrated by Uber, it grows again.
If you think of Uber as a giant supercomputer orchestrating the delivery of
millions of people and items all over the world (the Cisco of the physical world),
you get what could be one of the largest companies in the world.
AirBnb and Uber have only just become revolutionizing our fundamental human
needs (shelter and transportation) in a sharing economy. The Future is Here.

George Stoitzev

Law & Economics