The “Sharing Economy”: Estimating The Benefits From Ridesharing

11/04/2017

Aidan Calvelli

The “Sharing Economy”: Estimating The Benefits From Ridesharing

The “Sharing economy”: Estimating The Benefits From Ridesharing

The sharing economy has taken the world by storm – at least in the places where it’s been allowed to operate. Presented as a more efficient way to connect buyers and sellers, companies such as Uber have revolutionised ridesharing by introducing an entirely new level of ease and dynamism to the service. Uber works like a taxi service: customers use an app that allows them to request rides from drivers in their area. Its convenience and simple interface have made Uber the darling of young people looking for easy transportation: the whole process takes place on your phone – a millennial’s dream!

Yet despite Uber’s rapid rise, some have criticised its business model as disruptive, labelling it a company that displaces traditional taxi drivers without helping the overall economy. But thanks to Uber generously sharing its rich consumer database, a group of economists, including The Behaviouralist co-founders Robert Hahn and Rob Metcalfe, were able to measure the real economic benefits of the service. These results now let us more clearly compare the positive aspects of ridesharing with its potential drawbacks.

Using Uber’s data from 50 million user sessions in 4 major US cities – LA, San Francisco, New York, and Chicago – the economists calculated the demand for Uber. They then took the difference between what consumers were willing to pay and what they actually paid to calculate the economic benefits – or “consumer surplus” – going to customers.

What the study found was exciting – at least to an economist. For every 10% increase in the price of an Uber ride, there was only a 6% decrease in consumer demand. So, even when prices rise, many riders still think it’s worthwhile to use the service! This means that Uber riders are often getting a sweet deal: paying less than they are willing to for a service they enjoy. In fact, the study found that for every $1 spent on an UberX (standard) ride, consumers got $1.57 of extra consumer surplus. In the 4 cities where the study’s data comes from, the total consumer surplus from using Uber was a whopping $2.9 billion in 2015. Estimates suggest that across the US, consumer benefits from Uber approach $7 billion annually.

Rarely before have economists had such rich real-life data on consumer surplus. Now, economics students will finally have the chance to put the surplus theories from their textbooks to the test! But just as importantly, these numbers will help add clarity to the debates about whether the ridesharing revolution does more good than harm. Now, when critics claim that Uber is disruptive, supporters can point to tangible consumer benefits – $2.88 billion worth of them, to be exact. This doesn’t mean that ridesharing is uniformly beneficial, but the numbers do provide one data point showing its potential value.

On top of adding value for consumers and putting money into driver’s wallets, Uber may also provide some important social benefits – and ones exciting to more than just economists. A review of studies on Uber and other ridesharing services (such as Lyft) suggests that ridesharing might decrease overall levels of traffic congestion, and might even decrease greenhouse gas emissions. As the technology of ridesharing continues to develop, these benefits could become more widespread, bringing extra surplus into communities that previously didn’t get much benefit.

With low transaction costs, built-in trust mechanisms, potential social benefits, and all the economic pluses listed above, ridesharing has some clear advantages. On balance, it’s evident that the ridesharing revolution has made many consumers’ lives better. Still, there have been and likely will continue to be losers in this disruptive process as well – most notably the owners of taxi medallions whose monopoly profits are now being eroded.

No matter what we think of it, the ridesharing revolution appears to be here to stay. Indeed, many commentators think the revolution will spread dramatically, as societies move to using autonomous vehicles. With these major changes possibly on the horizon, studies like this Uber paper can serve as a useful guide to policymakers and citizens on the benefits and costs of disruptive technologies like ridesharing. But for now, while this societal debate keeps playing out, consumers can keep pulling out their phones to request an Uber – and reveling in the joy of getting more value than they paid for.  

 

Aidan Calvelli is a student at Brown University and an Intern Researcher at the Behaviouralist.