Economics

In the News

Evidence of diseconomies of scale at Uber

Geoff Riley

31st July 2019

Uber is laying off one third off their global marketing team as the business looks to cut their overhead costs and stem mounting losses.

I read today that, prior to the announcement, Uber employed 1,200 staff in their marketing team and four hundred are being made redundant. The business has nearly thirty thousand staff but nearly four million drivers. Yet despite the fast pace of expansion, losses remain huge and the share price is now trading below the IPO price of $45 a share.

Diseconomies of scale arise when a business expands in the long run but experiences mounting problems of cost control and suffers from inertia in achieving the necessary changes to make a business profitable.

The email from Uber CEO Dara Khosrowshahi which was leaked to several newspapers is revealing:

"Today, there’s a general sense that while we’ve grown fast, we’ve slowed down . . . Many of our teams are too big, which creates overlapping work, makes for unclear decision owners, and can lead to mediocre results,” he wrote. “So, put simply, we need to get our edge back. Being fast wins.”

The Times also reports that "The marketing team’s organisational charts ran to more than 388 pages."

If there is a clearer example than this of diseconomies of scale then please let me know!

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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