Uber And Lyft

Topics: Game theory, Prisoner's dilemma, Nash equilibrium Pages: 2 (548 words) Published: April 15, 2015
Nicole Arianne Tan
Shyamala Sethuram

Case Study 1: Prisoner's Dilemma (due: March 25).
Find an application of your own of a Prisoner's Dilemma situation. Thoroughly explain the situation: identify the players, the rules, and all the outcomes. You may simplify the example if needed (for instance, if there are n players, you can simply it to just 2 players). Include the payoff matrix, and do your best to put in real values (estimates) as payoffs. Make clear why your application is a Prisoner's Dilemma: what is the social optimal outcome, and what is the Nash Equilibrium. Suggest possibilities for (sustained) cooperation. What could be done so that the players' incentives discourage defecting?

Players: Uber and Lyft
Rules: Both companies develop, market, and operate a mobile-app-based transportation network, which allow consumers to submit a trip request to crown-sourced taxi drivers. Although Uber is the current market leader, competitors such as Lyft are now competing aggressively to get a larger share of the market. Both companies have the choice to maintain or lower their price. Uber currently charges a $2 base fare and $1.20 per mile. On the other hand, Lyft charges $1.31 as a base charge and $1.31 per mile. We are under the assumption that both companies act simultaneously and have no means of negotiating a contractual collusion. Currently, Uber’s net revenue is at $2 billion, while Lyft’s net revenue is at $300 million. Outcomes:

Both companies are aware that:
If they decide to increase their prices and the competitor does not, consumers will flock to the other service provider and $100 million of the net revenue of the higher priced mobile app will transfer to the lower priced competitor. If the competitor increase their prices and their company does not, consumers will flock to the other service provider and $100 million of the net revenue of the higher priced mobile app will transfer to the lower priced competitor. If neither increases its...
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