Risk, Reward and Disruption
The Judicial Scenario | Uber — Legality of the Business Model
This article is part of the “Economics” series which I have been writing for quite sometime now. The premise of this series is based on looking at various unconnected events in the world through the lens of economics.
This article talks about the role of risk and reward while committing an offence and defining the legality of the business models in today’s disruptive times.
Consider a scenario, you have just jumped a red light and you are caught by the traffic police. As a consequence, you will either be fined or have your license confiscated. Imagine if this was a planned offence, what will you be thinking? You will think about the various variables viz.,
- Is the junction crowded? (Probability of getting caught)
- Is it manned by a traffic police? (Presence of law enforcer)
- What is the penalty for the offence? (Fine or prison term)
- Is this a repeat offence? (Prior experience)
All these variables converge together on two aspects, one is the probability of getting caught and the other is the cost of punishment. If the odds are in your favour, you would take the plunge.
Interplay of Crime and Punishment
Nobel Laureate Gary Becker has established this phenomenon in an economic paper way back in the 1970s. The paper focused on the interplay of crime and punishment and the probability of a crime is a function of cost and benefit. Let’s look at how.
- From a justice system’s standpoint, there are steps taken and resources spent, both to prevent offences and to apprehend offenders. It is also important to note that conviction is not generally considered sufficient punishment in itself; the quantum of punishment also plays an important role.
- If you look at it from the offender’s standpoint, the expected cost (punishment) as a result of the crime multiplied by the probability of getting caught defines whether the crime will be executed.
The Judicial Scenario
Typically, even though the punishment for crimes like kidnapping and murder is fairly high, but the probability of the offenders facing the punishment is too low.
The key reason is that the law enforcement and the justice system is strained, not just with these type of severe cases, but offences such as cheque bouncing or cutting a tree (which may seem trivial in comparison to murder) are also considered as crime (if not heinous). All this added together reduces the probability of justice been served in a time bound and efficient manner. In fact, this provides enough impetus to the criminals to commit crime, as the cost-benefit works in their favour.
Uber — Legality of the Business Model
What we saw above was an interplay of crime and justice, but how does this play out in a complex business scenario — questioning the legality of a business model.
Before Uber came into this world, hailing a cab or a rickshaw was an inconvenient experience and I am sure everyone has their share of experiences. Uber picked up this problem and built an entire business around it. Its proposition was simple, through its mobile app one could hail a cab at the click of a button. It also provided the estimated fare and time of arrival, which provided a great deal of convenience to the customers.
Who are the drivers? The market was earlier dominated by city-wide taxi services and the supply was dictated by issuance of permits/medallions. Very often then not, the permits were in huge demand and it commanded a hefty premium.
Uber addressed this problem by opening its platform to individuals who had a car and a driver’s license. This led to an explosion of service and the way the taxi industry used to operate was disrupted forever. But this also led Uber to be swamped by a flurry of law suits. Out of all the legal troubles which Uber has been facing, the key one has been around its classification of the drivers.
The contention has been around whether the drivers on the Uber platform be classified as employees? If yes, then Uber is mandated to provide employment benefits such as insurance, paid sick time, etc. to the drivers.
Uber has been contesting this claim by a simple argument that it’s a technology platform and the drivers are freelancers/independent contractors who are not bound by a stipulated number of work hours. It has settled the cases in a few instances and in some cases they have taken a turn for the worse, as recently witnessed in California.
I am not getting into the legalese of this issue, but highlighting Uber’s strategy of solving a problem for the many en-masse thereby, disrupting the entire industry albeit creating a lot of ambiguity on the applicability of the existing laws.
To sum up
As you can see from the above instances, legality depends on a multitude of variables, which is also open to interpretation. Especially, when we are looking at ambiguous cases such as Uber and the likes, where the law in many cases is catching up with the emergent realities.
What do you think about this article? Would love to hear your thoughts.
Until next time!
~ Sajid
You may also like
