Uber grabs headlines for the headaches it causes the taxi industry or the ire its “surge” pricing induces on New Year’s Eve. But what are the benefits Uber provides such that taxi owners have reason to be worried about competition from Uber and customers are willing to pay surge prices?
The linked blogpost offers a basic explanation of consumer surplus (the value accruing to customers) and summarizes the findings of a recent study of Uber transaction data conducted by economists (including the author of the bestseller Freakanomics, Steven Levitt) at the University of Chicago and Oxford University. The economists estimate that, on average, consumers gain $1.57 in consumer surplus for every dollar they spend riding Uber. Put another way, the average consumer derives benefits from riding Uber for which s/he would be willing to pay up to 2.57 times Uber’s prices.
Assuming this estimate is accurate, a couple of interesting questions are raised:
(1) Is it good public policy to maintain or erect a regulatory apparatus designed to protect the legacy, cartelized taxi industry given that consumers, where they have a choice, choose rideshare services like Uber (or Lyft)?
(2) If consumers are deriving this much transactional surplus even within the operation of Uber’s surge pricing model, what role might surge pricing be playing in the business model besides transforming consumer surplus into producer surplus (i.e., price gouging)?
LINK: Uber’s Pricing Formula Has Allowed Economists to Map Out a Real Demand Curve: Consumers are reaping billions of dollars in value from Uber, a new study says (by ADAM CREIGHTON for Wall Street Journal)
Uber has created more than a booming ride-sharing market. It’s given economists a treasure trove of data to understand one of the fundamental concepts of economics: the demand curve.
Uber’s data is unique in two crucial ways. It records not only the time, place, price, and demand-and-supply conditions of every paid ride (encapsulated in a surge factor), but also of every occasion where a customer declines the offered price.
The authors use their curve to put some flesh on another theoretical economic concept, too: consumer surplus, what [19th Century founder of microeconomics Alfred] Marshall, who generated the idea, said was “the excess of the price which [a person] would be willing to pay rather than go without the thing, over that which he actually does pay.”
Uber riders enjoyed $1.57 in consumer surplus for every $1 they spent in 2015, the study said. That equates to $6.8 billion in consumer surplus across the U.S. last year, or $18 million a day. This was double what the drivers were paid, and six times what Uber itself earned. “These estimates of consumer surplus are large relative to the likely gains or losses experienced by taxi drivers as consequence of Uber’s entrance,” the authors said.
What do you think?