The Hidden Cost of Platform Diversification

When Uber eats its own business, and its competitors’ too

Platform Papers is a blog about platform competition and Big Tech. The blog is linked to platformpapers.com, an online repository that collects and organizes academic research on platform competition.

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This blog is written by Hyuck David Chung, Yue Maggie Zhou, and Christine Choi.

Image source: DALL·E 3

In the digital economy, platforms have become the nexus of technological and economic exchanges. In recent years, many platform firms have expanded their territories by diversifying into new businesses. For instance, Amazon, originally an e-commerce platform, has diversified into crowdsourcing and cloud computing businesses. Uber, which started as a rideshare platform, has entered food delivery and grocery delivery businesses. By leveraging platform technologies and a large user base from their primary business, platform firms can strengthen their influence across a growing number of new businesses. What is less clear, however, is the impact on the gig economy workers, or independent contractors in the digital economy.

Gig economy workers are a driving force in the digital economy. Platforms rely on gig economy workers to create value. At the same time, platforms lack direct control over them. For example, Uber cannot force its drivers to work during certain time periods or forbid them from also working on Lyft, a competing rideshare platform. Given their vital role in the digital economy, it has become increasingly important to understand how gig economy workers respond to platform diversification.

When Uber Eats Its Own Business, and Its Competitors’ Too: Uber’s diversification into food delivery

In a recent paper, we shed light on the impact of platform diversification on gig economy workers by investigating how Uber’s entry into food delivery impacted the rideshare drivers in New York City (NYC), the leading market for both the rideshare and food delivery businesses. Uber Eats was launched in NYC in March 2016. The launch of Uber Eats (and subsequent restaurants’ decisions to join Uber Eats) created an exogenous and heterogenous shock for rideshare drivers depending on their active geographic areas within NYC.

To quantify the impact of Uber Eats on rideshare drivers, we compare the changes in Uber’s and Lyft’s rideshare trip volumes between geographic zones where a significant number of restaurants joined Uber Eats to zones where no restaurants joined Uber Eats after Uber Eats was launched. Our results are twofold. First, Uber’s rideshare trip volumes decreased significantly after the launch of Uber Eats, revealing a hidden cost of Uber’s expansion. Second, Lyft’s rideshare trip volumes decreased as well, which suggests that Lyft partially paid for the cost of Uber’s diversification.

Additional analyses confirm that the reduction in rideshare trip volumes was not caused by the demand side – that is, diners switching from using rideshare services to ordering from Uber Eats. Rather, it was caused by rideshare drivers working on food delivery.

But why would rideshare drivers work on food delivery? In NYC, the hourly income for food delivery couriers was $12.21 compared to $14.25 for rideshare drivers. Our consequent investigations, as well as our interviews with rideshare drivers in NYC, suggest that drivers did not switch to food delivery permanently. Rather, drivers oscillated between the rideshare and food delivery businesses to maximize their profits.

The launch of Uber Eats enabled Uber drivers to share their driving skills and idle time (for rest and recovery, as well as waiting for the next transaction) between rideshare and food delivery. At the same time, sharing their skills and idle time between businesses required Uber drivers to temporarily reallocate their vehicles and some of their driving hours to food delivery. Such reallocation maximized the drivers’ profit but also cannibalized Uber’s rideshare business. For instance, many drivers continued to work in rideshare during rush hours but temporarily switched to food delivery during non-rush hours, which hurt the rideshare business.

Lyft was not an exception to such cannibalization. While Uber Eats provided a new profit opportunity to Lyft drivers, Lyft drivers had to log off the Lyft app to avoid getting rideshare requests from Lyft (and having to decline them) when working for Uber Eats. To avoid the scheduling burden across Uber Eats and Lyft (and being banned from the platform), some Lyft drivers chose to work on Uber and Uber Eats instead. This cannibalized Lyft’s rideshare business as well.

Managerial and policy implications

Overall, our paper reveals one hidden cost of platform diversification in the gig economy. In particular, entering a new business can incentivize gig economy workers to shift some of their resources to the new business, which in turn damages the primary business. Such cannibalization may occur not only in the diversifying platform but also in competing platforms. Our findings suggest that managers of platform firms should recognize the potential backfire on their primary business when considering diversification moves. More importantly, they should stay vigilant about diversification decisions not only by their own firm but also by competing platform firms, as these moves might divert their complementors away.

If platform diversification cannibalizes the primary business, how can a diversifying platform firm reduce cannibalization and retain complementors within its platform? First, a platform firm can increase compensation to gig economy workers in the primary business. For instance, to maintain drivers and user base in the rideshare business, Uber can increase the rideshare fee for the drivers and lower the price for the user.

Second, a platform firm can lower the costs of operating on multiple platforms by integrating them into one app (“super app”). For example, to operate on multiple platforms, rideshare drivers need to constantly switch apps to avoid receiving requests from a platform while completing transactions on another platform. Declining a request from a platform would lower their ratings and block them from operating on the platform. Because Uber and Uber Eats were integrated into one app, drivers did not have to forego unwanted orders or face scheduling burdens across different apps. This not only secured Uber drivers but also attracted Lyft drivers to Uber.

Beyond platform diversification, our findings offer implications for industry regulators. Although antitrust authorities have started to focus attention on platforms, policymakers have not settled on the best way to regulate platforms. Because a majority of gig economy workers work on multiple platforms at the same time, many platforms have become interdependent in the digital economy. Our findings caution policymakers against implementing regulations without fully understanding such interdependencies, as regulating one platform might have a cascading effect on other platforms that “share” these gig economy workers.

Our paper is not intended to predict the net impact of diversification but rather to highlight (and quantify) one hidden cost of diversification. Just as with traditional firms, the impact of diversification for platform firms is multifaceted and context-specific. We hope our study inspires further exploration of firm boundaries in the gig economy.

This blog is based on David, Maggie and Christine’s research, which is published in the Strategic Management Journal and is included in the Platform Papers references dashboard:

Chung, H. D., Zhou, Y. M., & Choi, C. (2024). When Uber Eats its own business, and its competitors' too: Resource exclusivity and oscillation following platform diversification. Strategic Management Journal.

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If you enjoyed this blog, have a look at these related Platform Paper blogs:

• Growing or Eating the Complementors’ Pie? (About the effects of Amazon’s diversification into smarthome markets on complementors.)

• Regulating Powerful Platforms (How regulation of sharing economy platforms can have unintended effects that might not always benefit gig workers.)

• Big Tech Platforms’ Entry into Healthcare and Education (Strategies deployed by Big Tech firms to diversify into healthcare and education markets.)

• The Slipstream Strategy (How traditional incumbents can first work with and later compete against digital platforms entering their businesses.)

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