Estimating Consumer Surplus - Uber

Issues and Impacts

Estimating Consumer Surplus - Uber

Estimating Consumer Surplus - Uber

Date – 2016

Client – Uber

Industry – Transportation

Problem – Uber is a technology company founded in 2009. Its success is built upon a smartphone application that matches people seeking rides to drivers that Uber has partnered with. Yet despite Uber’s popularity among its customers, some argue that authorities should regulate – or even ban – the company’s service on the grounds that it disrupts the taxi market. However, such arguments fail to take into account the potential benefits of the ride sharing service.

Solution – Economists often measure the benefits of a product or service in terms of consumer surplus. Consumer surplus is the difference between what consumers are willing to pay, and what they end up paying.

While consumer surplus is a simple concept, a lack of quality data makes it difficult to measure in practice. A team of economists – including The Behaviouralist co-founders professors Robert Hahn and Rob Metcalfe – were able to overcome this problem by analysing Uber’s own data, which covers nearly 50 million consumer sessions across Chicago, Los Angeles, New York and San Francisco. The rich dataset, in combination with Uber’s so-called surge pricing algorithm, enabled the application of a regression discontinuity design that was used to estimate the consumer surplus.

The Results

The study made several important findings, most notable among which are:

  • Uber customers are not particularly sensitive to price changes – a 10% price increase leads to a mere 6% decrease in demand.
  • For every $1 spent on an Uber ride, consumers gained an extra $1.57 in consumer surplus.
  • Uber generated consumer surplus worth up to $2.9 billion in 2015 across the four cities included in the study.
  • Back-of-the-envelope calculations suggest that Uber generates consumer surplus worth up to $7 billion each year in the US.