The Impact Of UberX On Taxi Demand Elasticity And Dynamic Pricing

Factors that Impact Demand and Supply

i.We provide comparison of a one way trip from Deakin College (Burwood) to Melbourne CBD.

Fare in a taxi ride:  $37

Fare in a UBer X : $32-44

ii.The difference in fares can be explained in terms of the model used by the taxi driver to price the ride as the distance and start-destination points are same. The actual fares may be still more divergent based  on the traffic incurred and time taken for idling at traffic signals or for other reasons. In terms of modelling we can hint at two reasons for differences in fares:

a.UberX uses dynamic pricing which is a real time system that matches demand and supply at every second to determine the free market rate. It allows for dynamic shifts in demand and supply curves (or the market forces) to determine the fare in a free market. The simple taxi ride uses a ‘fixed’ fare kind of model that only looks at distance as the governing factor .     

b.Some difference can also be attributed to the difference in car possibly. We can expect a bigger taxi to charge a higher fare.

iii.The diagram is shown below

When UberX is introduced we can expect the demand and supply to shift. We can expect supply to rise as more taxi owners join UberX. This will shift the supply curve to right as shown. The effect is that prices will fall, while number of rider will increase.

WE show the rise in total surplus in ed. This happens because price is lower and quantity is higher now.

While demand can also change we cant be sure of the quantitative changes without actual data. All we can conclude is that society surplus or efficiency will improve if prices are lower and quantity is higher.   

i. Price elasticity measures the responsiveness of demand to price changes, if all other determinants of demand are unchanged. Its value varies from 0 to infinity, reflecting  complete inflexibility of demand to complete flexibility. A demand elasticity value of -0.8 implies two things:

Taxi rides area normal good as the sign is negative. This means that as price of taxi rides rises, the demand will fall.  

The value of elasticity reveals the extent of flexibility of demand. A value less than 1 implies demand is inelastic. So we can say that demand for taxi services without ride sharing is relatively inelastic. On the other hand the introduction of ride sharing increases the flexibility, so that demand is now relatively elastic. This is seen from a value of 1.2 that exceeds 1. (Aggarwal, n.d.)

Rise in Total Surplus

ii. Demand elasticity for tax services has thus risen from inelastic to elastic. To understand this we must look at the factors that impact on elasticity.

Some of these factors are: (Csun.edu., n.d.)       

• The presence/absence of substitutes: If we have easily available substitute then demand is more flexible as consumers can move to substitute goods. Greater number of substitutes for a good X cause demand elasticity of X to be elastic.
• Nature of good- Necessity or Luxury.The elasticity of necessity goods is lower as consumers cannot do without it. If price were to rise they cant reduce its consumption as it is a necessity ( salt is an example). But luxuries have inelastic demand as consumers can do without it or change their consumption pattern to lower demand for the luxury.
• Time period considerations.  Given adequate time al consumers can change demand patterns, which shows that demand is more inelastic in the short run. An adequate period can alter demand and make it more elastic. Consumers can shift to substitutes and/or change their degree of attraction for a good.  

In our case we can see that the introduction of ride sharing has increased the options available to the consumer. She can go solo or take sharing taxi which lowers her cost without affecting the goal of reaching a destination. This expansion in available substitutes has made demand elastic.  

iii. Fixing fares is equivalent to interference in the market. This s shown below. If the free market price or taxi fare is P* then the government fixes it at P1 , which is lower than P*, as P* is perceived to be higher.  This leads to inefficiency which is referred to as deadweight loss. At P1 many consumers go without a ride as there is a shortage of taxi drivers willing to take riders (sell rides) at P1. Those who manage to get a ride ( Q1 number) are happier paying a lower price, but Q2-Q1 are unhappy as they go without a taxi. The total effect on society is that  the sum of consumer and producer surplus is lowered by the red area.

Dynamic pricing refers to a pricing model where demand and supply is matched every second to reveal the equilibrium price, rather than the satatic prices that we see in the diagram. If for any reason demand is lower ata particular time and place then Uber will show a lower fare, even lower than P1. This can be P2. (Dynamic pricing, n.d.)

P2 is possible if the supply is higher and demand is lower ata given time of the day.

This system accounts for ontime changes in demand and supply to arrive at an equilibrium fare that is dynamic, erasing the need for controlling fares. This system allows fares to be different for same route, accounting for different time and traffic conditions, and available supply.  There is no effciecieny loss or deadweight now. This way the market forces of demand and supply optimise the resources to maximise efficieny, which is defied as the sum of consumer and producer surplus.

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