Some Waymo Economics!

In this Substack, I will not discuss the Trump Tariffs. Instead, I would like to discuss the demand for this American product.

As Waymo rides through West Los Angeles, Phoenix, and Downtown San Francisco, people become accustomed to the idea that cars don’t need a driver, and people, including myself, take rides in these vehicles. Our anxiety declines with this cumulative experience. Many of us are willing to pay a premium to take this ride and tell our friends that we did.

In this Substack, I want to discuss another attribute of riding in a driverless vehicle: safety. Here are some facts supplied by Waymo.

Suppose these reported facts are true. People want to be safe. If riders perceive that Waymo is safer than Uber and Lyft, then Waymo can charge a price premium for its rides. Economists celebrate that we can infer how much people value safety from the price premium they pay for safer products. For example, when I was young, the Volvo had a reputation as a safer vehicle. Economists would ask if the car is safer or whether safer vehicles attract safer drivers to drive them.

Traffic safety is a complex function that involves the driver, the vehicle, the situation (including day or night and weather conditions), and the traffic on the roads.

Self-driving vehicles are less likely to be distracted, as they don’t text and don’t drive while intoxicated. They have more sensors than humans and react faster.

If, over the next decade, more miles are driven by ride-sharing companies with human drivers and self-driving vehicles, will Waymo's safety gains decline? Are professional drivers roughly as good as Waymo drivers? Uber and Lyft would need to make a decision on whether to switch to driverless vehicles or offer cheaper (riskier) rides. Would Waymo respond by having a price war as Waymo doesn’t employ drivers? Industrial Organization economists will be able to write new papers here.

I pose this question because Waymo’s revenue can rise either because more Uber passengers switch to Waymo or because more drivers switch to Waymo. If public transit riders switch from buses to Waymo, does aggregate transportation safety per mile increase or decrease?

If the roads become safer over time, then our collective “arms race” of vehicle choice will diminish. In a very nice RESTUD paper, my friends argue that many Americans are buying Big Cars (SUVs) to avoid being injured in a collision. This is the Bad Nash Equilibrium (think of thin (and smart) Russell Crowe in A Beautiful Mind). The rise of Waymo would bring an end to this ugly equilibrium.

Here is a user-friendly version of their paper.