How much more do Uber’s riders value the trips they take relative to the amount they pay? These authors trace out the demand curve for Uber trips by estimating elasticities, or changes in quantity demanded with respect to price, at various surge levels. In general, this is hard to do because equilibrium prices are correlated with demand. In this case, the authors take advantage of the fact that a continuous measure of suggested surge pricing is rounded before being presented to consumers. In other words, although market conditions are similar at suggested surge levels of 1.249x or 1.251x, these two situations result in consumers being presented with surge of 1.2x or 1.3x, respectively. As a result, the change in demand at this discrete increase can be attributed to the price change rather than underlying market conditions. Using this demand curve, the authors estimate that UberX generated $6.8 billion in consumer surplus in the U.S. in 2015, or $1.60 for every dollar spent.
Peter Cohen, Robert Hahn, Jonathan Hall, Steven Levitt, Robert Metcalfe
Economics and Market Design