The Fog of AV Economics

Thomas Reiner yesterday wrote a thoughtful piece about a key question about AV ridesharing: what should be the optimal size of AV fleet in a given area? Should it try to cater to peak demand or average demand? Reiner makes the case that “the profit-maximizing fleet size is just shy of peak demand”. This particular paragraph stood out to me (emphasis mine):

“The central tradeoff in AV fleet sizing is between utilization and pricing power and it is fundamentally non-linear. At small fleet sizes adding vehicles increases utilization and captures unmet demand, but eventually once the fleet approaches full demand coverage incremental vehicles no longer create meaningful new trips, they simply reallocate demand across more idle assets. At that point utilization falls faster than volume rises, as incremental trips are spread across an expanding base of idle vehicles rather than concentrated on high-value hours.

Unlike human drivers, AV fleets do not naturally exit the market when prices fall, so oversupply persists and price becomes the only clearing mechanism. This is also why cost optimization alone cannot fix an oversized fleet. Once pricing power is lost, no reasonable reduction in depreciation, charging, or maintenance can restore profitability.”

When supply is tight, you can charge for speed and certainty. When supply is abundant, everyone is fast, and the only remaining lever is price. Given this dynamic, there are some interesting implications, especially in light of Tesla’s comments in their 4Q’25 call which I will discuss behind paywall.

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