Ann Arbor Times

When Uber expanded into food delivery, the move was expected to bring additional revenue to the ridesharing company. It certainly did.

Since its inception in 2016, Uber Eats has experienced significant growth. However, this expansion came at a cost. Recent research from the University of Michigan reveals that Uber Eats has cannibalized Uber’s core business, reducing rideshare trip volumes for both Uber and Lyft.

The study, conducted by Yue Maggie Zhou, associate professor of strategy at U-M’s Ross School of Business, and co-authors Hyuck David Chung and Christine Choi, analyzed data from New York City’s rideshare and food delivery markets in 2015 and 2016, with additional tests in 2019. They found that a 1% increase in local restaurants joining Uber Eats led to 2% fewer Uber trips and nearly 7% fewer Lyft trips.

The drop in rideshare volumes is largely due to drivers switching between two services to maximize their earnings, the researchers say. Uber’s expansion into the food delivery business allows drivers to use their idle time for food delivery.

“When a significant number of drivers flock to the new business, the rider who requests the trip now has to wait for a longer time to be connected with the next available driver,” Zhou said. “When such experiences accumulate, the rider might decide to leave the platform, causing other riders to leave (due to direct network effects) and some drivers to abandon the platform (due to indirect network effects). As a result, the rideshare volumes dropped following the launch of Uber Eats.”

Lyft also suffered from Uber Eats’ impact. Before Uber launched its food delivery business, Lyft drivers interested in food delivery had to juggle multiple apps like Lyft and DoorDash.

“Declining requests from a platform may lead to a lower performance rate and fewer orders assigned from the platform in the future,” Zhou noted. “Oftentimes, drivers had to use multiple smartphones to manage scheduling burdens across different apps. The coordination costs of managing multiple platforms discouraged some rideshare drivers from working in the food delivery business.”

With Uber’s diversification into food delivery, drivers could choose which service they wanted through settings on one app instead of juggling multiple platforms.

“This not only lowers coordination costs across different apps but also minimizes idle time for Uber drivers,” Zhou said. Consequently, some Lyft drivers switched from using Lyft and DoorDash to using only Uber and Uber Eats.

“Our research highlights the hidden cost of Uber’s diversification,” Zhou stated.

Annually, the launch of Uber Eats reduced Uber’s potential trip volume in Manhattan by about 3.3 million trips. With an average fare of $15 per trip and Uber collecting 20%, this translates into a $10 million annual revenue loss in Manhattan alone. For Lyft, there was a reduction of 1.3 million trips leading to a $4 million revenue loss.

To reduce cannibalization effects, platform businesses can increase compensation for existing services or encourage within-platform multihoming. For instance, increasing rideshare fees for drivers while lowering prices for riders might help mitigate losses.

Additionally, rewarding drivers who complete more rideshare trips or food deliveries could attract new drivers or divert them from competitors like Lyft. Lowering coordination costs within platforms may also draw drivers away from rival firms.