Unlocking the Demand Curve: Quantifying Consumer Surplus with Uber

Abstract

Consumer Behavior and the Demand Curve and Supply Curves Demand and supply are concepts that form the foundation for economics and research in the field. Despite their significance, the data to compute demand curves is mostly unviable for most industries and economists are unable to establish the actual effect of prices on demand. Uber is an economist’s dream since it offers data on how customers respond to price changes allowing for the calculation of the demand curve and estimation of the customer surplus. In the case of Uber, the demand for services leads to price surges which in turn increases the supply of drivers at a particular time (Qian et al., 2020). Low demand for transportation leads to the app charging the regular prices and many drivers are not motivated to work at those prices. The company offers economics the opportunity to quantify the response of consumers to price changes and the impact on the supply of services by drivers. An analysis of Uber’s demand curve demonstrates the consumer surplus indicating the total amount of money that consumers are willing to pay for services above the prices in the market. Movements in the market result from diverse interacting forces that make it harder to establish the actual demand curves. Levitt was able to determine the demand curve by collecting data from Uber users in four American cities to determine the consumer surplus. In the Freakonomics hosted by Dubner, Levitt explains that he used the surge pricing algorithm used by the company and data from almost 50 million observations to create a demand curve. The organization uses the surge algorithm to set prices for consumers during high and low demand scenarios (Sabouri et al., 2020). When there demand for Uber services is higher than the supply, the company’s app sets a higher price such as 1.2 or 1.3 times the regular price. Levitt used the data indicating the demand for services and how consumers responded to surge prices to estimate that the consumer surplus for Uber X in the United States was close to $7 billion in 2015 (Qian et al., 2020). The data demonstrated how often consumers accepted or declined to take Uber services at certain surge price levels to demonstrate how much they were willing to pay for services. The resulting demand curve indicated the consumer surplus and the amount the American consumers were willing to pay for the company’s services. An elastic demand curve is when the rise in the prices of a product or services causes a relatively lower decline in the demand from consumers. It results when the consumer surplus for the product is relatively higher than the prices the organization charges consumers. In an inelastic demand curve, many consumers are willing to buy the product even when there is an increase in the price. For instance, the doubling of Uber prices during Levitt’s study led to a 40% decline in the demand for the services. The findings from the study showed that Uber customers were willing to pay higher prices rather than fail to pay for services when there were surge prices. Cohen et al. (2016) used the inelastic demand curve to compute the consumer surplus of the service the company offered to American consumers. Inelastic demand shows that the consumers of a particular product or service are willing to pay an amount higher than the sellers are demanding. Demand and supply for products and services change from time to time depending on the industry and the actors in the market. For Uber, the demand and supply changes affect the prices of rides in different markets (Angrist et al., 2021). Factors such as changes in the weather, time of the day, and special events occurring in a certain part of the city may change the demand for the services of the organization. During rush hours where people are going to or leaving for work during the week, the demand may increase more than the supply of drivers (Qian et al., 2020). Additionally, the patterns of demand during the day may vary between the week and during the weekend. Supply changes depending on the number of drivers willing to work at a particular time. Big events and weekend nights may experience a lower supply than demand for drivers of Uber leading to higher prices for the services. The demand curve for Uber may shift to the right when the customers are willing to pay higher for the services of the organization. A shift to the right in the entire demand curve indicates that demand increases for all the price points for the organization. The shift may occur when the organization’s competitors and alternative products are less appealing than Uber for transportation (Pembecioğlu & Gündüz, 2020). Demand would increase at all price points if other taxi options became unavailable or when more people are willing to use Uber than other means of transportation. In both instances, the demand would increase from forces that are unrelated to the prices of the product. A shift of the entire demand curve demonstrates that factors apart from the pricing of the product or service have affected the demand from consumers. The supply curve would shift to the right as a result of market factors that increase the number of people willing to drive other than prices. Changes in legislation in the taxi hailing industry that favors Uber driving would shift the curve to the right since more people would find the job lucrative (Shokoohyar et al., 2020). Additionally, a decline in the costs of operating a...