Usually, when the supply of a product increases, the price of that product will decrease because the market will be more competitive. This, of course, is theory-in-a-vacuum. It’s logical on paper but there are exceptions in the real world.

Here’s an interesting case from Indonesia’s online transportation economy.

When there are few online transportation drivers, the price is quite low. The drivers don’t complain because they get many customers. The low profit per ride they get is multiplied by a lot of ride causing them to get good profit.

And then, the market, as usual, realizes the profitability of being an online transportation driver. And so, many people sign up to become drivers which increases the supply of online transportation.

Price should fall, right?

This is what actually happens.

The low profit per ride that drivers make is now multiplied by less and less amount of ride that each of the drivers gets. More drivers mean fewer customers for one driver, which means low profitability for each driver.

So, they unionized and demand an increase in tariff per km, which is then granted by the government.

Supply-increase thus can cause price-increase.

This shows that theories have inherent assumptions, such as the nonexistence of union and government.

It’s useful to make assumptions to make theory-building simpler. But, applying the theory in real life without keeping the assumptions in mind (which is very hard to do because humans forget things all the time) can causes predictions to be really wrong.