1.i) The term “disruptive technology” refers to that type of innovations in technology which leads to creation of a new genre of market and demand and supply structure and with time displaces an established traditional market, its products, key players and the alliances of that market (Fan and Suh 2014).
ii) There are many examples of disruptive technology with progressing innovations and adaptation to new technologies. Two of such examples are as follows:
a. The invention of telephonic services can be taken to be one of the major examples of disruptive technology as it completely changed the mode of communication eventually and replaced the previous telegraphic mode of communication.
b. Another example of disruptive technology is the introduction of the USB drives in the market for storage of data. Due to their small size, portability and bigger storage capacities, these devices took almost the whole of the market for CD and floppy drives (Russell 2012).
2. i) The cost of travelling one-way from the Deakin College situated in Burwood to Melbourne’s CBD in a taxi may range from $37.41 to $52.37 (Taxifare.com.au, 2017). However, the same distance (One-way) can be travelled in a UberX within the cost range of $29 to $37, which is comparatively much lesser than that of the fare of taxi in Melbourne (Uber.com, 2017).
ii) It is evident that the cost of using an UberX is much less than that of a taxi, in general. There may be several factors contributing to this price difference, two of which are as follows:
The convenience of availing the services of Uber and its easy and fast availability has shifted a major share of the customers from the traditional taxi using sector towards itself. This may imply that the company is currently experiencing economies of scale which is making it able to charge lower than that of the traditional taxi sector.
The taxi industry has many constrictions like minimum fare, maximum fare and limited availability, whereas Uber uses the mechanism of dynamic pricing, which allows it to charge according to demand, thereby keeping its price close to the equilibrium level, unlike that of the competitor (Gabel 2016).
iii) The point to point transport industry mostly emphasizes on the convenience of the customers, by enabling the customers travel on their preferred route at the time of their convenience. The industry has gained immense significance over the years with expanding commercial connections and people travelling more. Initially, the supply side players of the point to point transport market included only a few agents, like taxis and hired cars, with taxis taking the major share of the market (Gabel 2016). With an increasing demand and no other significant competitors, taxis enjoyed huge market advantages, as can be shown with the help of the following diagram:
Figure 1: Demand and supply of point to point transport
(Source: As created by the author)
It is evident from the above diagram, that initially, the taxis being the sole significant service providers in the market, they faced huge demand in the market. With limited supply, they charged a high fare, P0 and produced supply of amount Q0, thereby keeping the market at equilibrium at the point E0. The initial consumer surplus was only of the amount CP0E0, while the initial producer surplus was considerably high, with P0AE0 being the total producer surplus, which was mostly enjoyed by the taxi service providers (Mankiw 2014).
However, with the introduction of the Uber Company in the point to point transport market, the number of suppliers increased as the taxi service providers faced stiff competitions from that of the Uber cabs. The increase in the supply resulted to a rightward shift of the supply curve, from S0 to S1. Due to the arrival of competition in the market, the price came down to P1 and the amount of supply and demand increased to Q1, with the market reaching at equilibrium at the point E1. The consumer in the final market increased significantly from CP0E0 to CP1E1, while the producer surplus dynamics is ambiguous though it can be concluded clearly that much of the producer surplus is now enjoyed by the new entrant in the market, that is, Uber (Mankiw 2014).
3. i) It was estimated by the ACT government (2015) that in absence of the cab services of Uber, the price elasticity of demand for the taxi services was -0.8. This in economic terms imply that with a one unit increase in the fares of the taxi services, the demand for the same decreased by 0.8 units, that is the change in demand was less than proportionate to the change in price.
However, from the same estimation, with incorporation of the Uber services, the same price elasticity was seen to be -1.2. This implies that now, the fall in demand was more than proportionate to that of the increase in the price. This may be because of the presence of substitute like Uber in the market as now, with an increase in the taxi fares, unlike before; people can shift to Uber for transport services (Rios, McConnell and Brue 2013).
ii) The pricing mechanism of taxis are highly regulated, with the presence of ceilings in the forms of maximum fares, while that of Uber is dynamic. Dynamic pricing mechanism is comparatively a newer method of setting prices, which allows the company to charge different prices according to the demand dynamics in the market. This means, with this pricing mechanism, a company can charge higher prices for their product or services in presence of higher demand in the market and can reduce the prices of the same product in presence of a lower demand for their product or service. On the other hand, highly regulated pricing structure induces the sellers to charge a stipulated price, no matter what the demand for their product is, thereby creating disturbances in the demand and the supply side of the market (Chen and Sheldon 2016).
The dynamic pricing system shows more efficiency in terms of allocation of resources and the concept goes at per with the concept of invisible hand in the market economy, which is assumed to bring the market to equilibrium through the mutual interaction of the demand and the supply forces. However, due to the absence of any kind of restrictions, the prices can go up very high in case of high demand and very low at times when there is very less demand, thereby hurting one of the sides, the buyers or the sellers. Presence of maximum fare and other price restrictions reduce this risk, especially for the buyers, by settling a ceiling for the prices that can be charged at any circumstances (Rios, McConnell and Brue 2013).
References
Chen, M.K. and Sheldon, M., 2016, July. Dynamic Pricing in a Labor Market: Surge Pricing and Flexible Work on the Uber Platform. In EC (p. 455).
Fan, L. and Suh, Y.H., 2014. Why do users switch to a disruptive technology? An empirical study based on expectation-disconfirmation theory.Information & Management, 51(2), pp.240-248.
Gabel, D., 2016. Uber and the Persistence of Market Power. Journal of Economic Issues, 50(2), pp.527-534.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Russell, A.J., 2012. First steps on the path to defining disruptive science and technology.
Taxifare.com.au (2017). Taxi Fare Calculator – Estimate your taxi fare. [online] Taxifare.com.au. Available at: https://www.taxifare.com.au/ [Accessed 2 Sep. 2017].
Uber.com, C. (2017). Get a Fare Estimate in Your City. [online] Uber.com. Available at: https://www.uber.com/en-IN/fare-estimate/ [Accessed 2 Sep. 2017].
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