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Uber and Lyft are threatening to leave Minneapolis after the city council passed a bill that requires the companies to pay drivers a minimum of $1.40 per mile and $0.51 per minute. To put my cards on the table, I love ride-sharing apps. I love the convenience and prices of Uber and Lyft. Also, since I live near Minneapolis, I’m not excited about driving to the airport and paying for parking for a 6 AM flight. If I didn’t have kids and still went out to bars, I’d be worried about how to handle that as well. Exiting Minneapolis would disrupt the whole Twin Cities ridesharing network.

However, in this article, I'll use the principles of price theory and what we know from empirical research to unpack the potential impacts of the driver-pay mandate, assess the credibility of Uber and Lyft's exit threats, and explore the broader challenges of regulating platform markets. As always, general principles about competition, supply and demand, and trade-offs are at play.

At the most basic level, ridesharing platforms match drivers (labor and capital suppliers) with riders (transportation demanders). The prices riders pay, and the wages drivers receive are determined by the interaction of a supply side and a demand side in each market, with the spread being the platform's potential profit. Supply and demand, with a spread. That’s the starting point. There’s competition between drivers, platforms, and riders.

An important aspect of competition in almost every market is entry and exit, especially this one. If the price is too high, riders substitute for other options, pushing prices down. If the price is too low, drivers decide it is not worth it and stop driving. Supply and demand always. This ease of entry and exit for both drivers and riders creates a highly dynamic and competitive market environment.

The one complication is about competition between Uber and Lyft. Platforms take a little more work to build a network, which is why there are not 1000 apps. But competition between two very similar products constrains the spread each app is able to capture on average. Yes, the brands are competing for each ride, but they are also in a bigger game across many cities and rides. This is like how Walmart competes on milk but also competes to get you in the store.

If the two apps are identical, two platforms are enough for perfect competition, and the Uber/Lyft fee will be just enough to cover fixed costs, so the companies will earn zero profits. Remember, Bertrand competition with 2 companies generates zero profits and perfect competition. Nothing about platforms or networks changes that basic, competitive logic.

What if other companies are able to pay more?

In response, Minneapolis is considering giving $150,000 to “new and emerging rideshare companies.” One lawyer responded, “This is a great idea. The drivers and cars didn't go anywhere, they are still in Minneapolis. If the people who do the work get financing, they could establish a democratic alternative to the VC-run Uber and Lyft.” This sentiment echoes a common idea in the debate over driver pay: “If a company can't afford to pay their drivers a livable wage, maybe that company doesn't deserve to exist.”

But this fundamentally misunderstands the economics. Those organizations could exist right now. They could attract drivers today by paying this “livable wage.” They don't because creating a successful ridesharing platform is not as simple as just connecting drivers with riders. And just because Uber/Lyft aren’t making crazy profits does not mean they are not generating immense value.

The reality is that the economics of the ridesharing market are complex and competitive. Uber and Lyft have invested billions of dollars in developing platforms, building brand recognition, and achieving the critical mass of drivers and riders needed for a well-functioning marketplace. This is a fixed cost that needs to be covered for any company to be profitable. It’s not a barrier to entry that insulates the companies from competition.

Could government subsidies prop up other ridesharing apps? Of course. I’m not sure $150,000 is enough to prop up many of significant size, but I’ll say I have an app if the city is giving out $150,000. But the point isn’t to have 1,000 apps. No one benefits from that. Well, no one besides the app owners getting the subsidy.

Instead, there is a trade-off between more platforms possible (but not necessarily) generating more competition vs. more platforms requiring more switching and searching for drivers and riders. In a world where the platforms do the exact same thing, we only need the two best platforms to compete. That’s also what we’ve tended to see.

What has been the outcome so far?

Taken as a whole, the data on these markets suggests things are fairly competitive, hence why it is hard for a bunch of other firms to enter. There are low profits for Uber/Lyft, a high driver and rider surplus on average, and a low surplus on the margin. If you know this data, feel free to skip to the next section.

In the popular discussion, there’s a lot of focus on the rider benefits. The research side seems to support this intuitive idea. For example, Cohen et al. (2016) estimated $2.9 billion of consumer surplus in just 4 cities in 2015. That’s $1.60 of surplus for each dollar spent. In other words, if a rider was willing to pay $26 for a ride, they only had to pay $10. For a rough calculation, they estimate $6.8 billion in consumer surplus for that same year. That’s just the start. The apps also reduce moral hazard on the driver’s part—no taking the scenic route to have the meter tick up—which benefits consumers. There’s also the huge consumer benefit of not dying from driving drunk (as well as the positive externality for others).

But this policy debate is really about the drivers. I’m not saying the attitude is riders-be-damned, but the stated goal is to help drivers earn more money.

There’s probably more research on the benefits for drivers. For a few examples, Chen et al. (2019) find huge benefits to drivers: “Despite other drawbacks to the Uber arrangement, we estimate that Uber drivers earn more than twice the surplus they would in less-flexible arrangements.” This flexibility is valuable for drivers and something we see across gig work. Angrist, Caldwell, and Hall (2021) find drivers prefer the current business model where a fee goes to Uber to an alternative system with a “virtual medallion.” If you prefer to ask people how they feel, Berger et al. (2019) find that “while Uber drivers remain at the lower end of the London income distribution, they report higher levels of life satisfaction than other workers.” This is an important point. No one is getting rich driving for Uber and Lyft. But that’s not the relevant counterfactual.

The studies above point to the pecuniary and non-pecuniary benefits that ridesharing provides drivers. We could speculate about additional advantages, such as directly monetizing assets they own (cars) with low opportunity costs or access liquidity during unexpected shocks. (HT: Economic Forces reader Hugo Jales for this point about the opportunity cost of cars.) But ultimately, we don't need to exhaustively enumerate every possible benefit to conclude that drivers derive value from the Uber/Lyft arrangement. The revealed preference of drivers continuing to partner with the platforms, given the alternatives available in the labor market, tells us they are making the most beneficial choice. In economic terms, the fact that tens of thousands of drivers voluntarily supply their labor to Uber/Lyft each day is a strong signal that they prefer it to their next best option. This doesn't mean it's a perfect arrangement or that driver welfare can't be improved on the margin. But it should give us pause in dismissing the entire business model as exploitative or unsustainable, as some writers have.

Why not just raise prices?

So far, I’ve assumed Uber and Lyft will leave and the lost rider and driver benefits that would entail.

But maybe they won’t leave. Some might argue that Uber and Lyft’s exit threats are merely a bargaining tactic to pressure the city council to rescind the pay mandate. However, the companies have followed through on similar threats in the past. In 2016, Uber and Lyft temporarily left the Austin market after the city passed regulations requiring driver fingerprinting and background checks. This suggests that the companies are willing to walk away from markets where they believe the regulatory environment is incompatible with their operations.

But why not just raise prices? Yes, it will reduce the number of fares but surely there are still some profitable trips. Why is the profit-maximizing amount suddenly zero?

There are a few subtleties of the market to keep in mind. Remember, the apps aren’t just competing in Minneapolis. If travelers from Chicago open that app and see high prices, they may just think Uber has high prices overall, which could reduce sales back in Chicago. Uber is concerned about their overall profits, not just in Minneapolis. At the same time, closing down in cities is not ideal either. If that happens in more and more cities, travels will no longer be able just to assume they can open the app when they land in a new city. As always, there are trade-offs for the companies. All I’m saying is its plausible the optimal thing to do would be to shut down in a city, as in Austin.

The bigger issue is that Uber and Lyft just aren’t that profitable because of the stiff competition. I’ve mentioned the market is competitive, right? In the basic economic model, if profits are zero, anything that raises costs—even a penny—will cause firms to exit. This policy clearly raises costs, and they may not be able to raise prices while still covering fixed costs. Again, the story isn’t quite so neat because the minimum wage would also raise their rival’s costs. Since Uber’s costs are higher, Lyft doesn’t have to worry about being undercut by Uber. In jargon, the residual demand curve for Lyft shifts out because Uber’s price is higher. This allows Lyft to raise prices more in response. However, at some point, the cost increase will sufficiently outweigh the demand increase for each firm and the optimal thing will be just to shut down.

But the minimum wage studies!

At the end of the day, this is a minimum wage debate in a different form. If Uber and Lyft do not exit, the policy could benefit drivers by raising their wages. That’s always possible for any price control, and there is lots of evidence suggesting that small minimum wage increases do not increase unemployment. I’ve written about the minimum wage before; there is no need to rehash everything there.

Here is where the level of competition is important. If labor markets are competitive, as the evidence suggests in the case of ridesharing, then a price floor (minimum wage) set above the market-clearing price will lead to a shortage of rides. There’s no disputing that if markets are competitive. In other words, there will be more drivers willing to work at the mandated wage than there are riders willing to pay the corresponding higher fares. This mismatch between supply and demand is what leads to the prediction of job losses in most markets, or in this case, fewer trips for drivers and more waiting around for those fewer trips. More waiting is more deadweight loss for everyone. Alternatively, the companies could limit how many drivers they allow. Either way, supply and demand must adjust to clear the market at the new price, just with less value to riders and drivers.

That is why I've spent so long stressing how competitive these markets are. The intensity of competition between Uber and Lyft, the ease of entry and exit for drivers and riders, and the wealth of empirical evidence on the benefits to both sides of the market all point to a competitive environment. In such a setting, the standard economic model predicts that interventions like price floors will have real costs in terms of efficiency and welfare.

None of this is to say that the status quo is perfect. There may well be targeted policies that could improve outcomes for drivers without fundamentally undermining the economics of ridesharing. But blunt instruments like uniform pay mandates that ignore the realities of competition are likely to do more harm than good.

This debate is about trade-offs. Ridesharing has created enormous value for consumers, drivers, and communities. Undermining the basic model risks losing those gains. Policymakers need to weigh any potential benefits of intervention against these very real costs.

The lesson here is not that economics always opposes regulation or that free markets are always optimal. Rather, it's that effective policy needs to be grounded in a clear understanding of the economic forces at play in a given market. In the case of ridesharing, that means grappling with the realities of competition, the complexities of platform dynamics, and the actual preferences and alternatives of drivers and riders.

Slogans like “pay a living wage or go out of business” may fit on a bumper sticker, but they're not economic analysis. If we want to find solutions that actually make drivers better off while preserving the immense value of ridesharing, we need to understand the economics. There are no easy answers, but there is a path forward—if we're willing to follow where the economic reasoning leads.

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