Dynamic Pricing and its Impact

This assignment explores the concept of dynamic pricing in the context of the ride-hailing industry, specifically focusing on Uber as a case study. Students are tasked with analyzing how dynamic pricing affects taxi fares, considering factors such as demand, supply, and market equilibrium. The analysis should delve into the impact of dynamic pricing on consumer surplus, producer surplus, and overall market efficiency compared to traditional price-capping mechanisms.

Answer 1:
A. A disruptive technology ‘is a new emerging technology that unexpectedly displaces an
established one’(Fonseca, 2014). Sucha technology is often new, and lack refinements and
come with limited proven applications. As the name suggests ‘ disruptive’ technology
disrupts existing systems and technology, by showing that the latter is inefficient and has the
capability to disrupt existing systems and word styles. The word was coined in 1997 in The
Innovator’s Dilemma by Clayton M Christensen, a Harvard School professor. (Clayton et al.,
2015)
B. Since 1997 we have come along way and there have been many technologies that disrupted
the ecosystem in the world. Some succededwhile others persihed as they could not
sustain /prove their applicablity ona wide basis. Two successful examples that come to mind
include-
Robots that have the potential to replace humans as workers ina factory floor and other
workplaces.
Self driving cars is another example with enormous benefits. Their use in wars can save lives.
They have been used to detect land mines and have proven useful already.
Answer 2:
i. Trip: Deakin College (Burwood) to Melbourne CBD.
Fare in a taxi ride: $37
Fare in a UBer X : $32-44
Source: SilverTopTaxi: ; Uber: https://www.uber.com/en-AU/fare-estimate/
ii. The difference in fares could be due to many factors which are due to different models
used. Each model considers different determinants of demand and supply. Assuming
that distance and start-stop points are same fares can differ due to the following
possible reasons:
1. A normal taxi and Uber taxi use different models. One is static and Uber is dynamic.
The latter updates demand and supply conditions constantly to allow fares to
change on real time basis. A normal taxi fare is based only on distance asa
parameter and possibly time taken in idling over the journey. UberX considers
supply side as looks at available taxi drivers in the vicinity of the order booked to
arrive at a fare. Higher demand with higher supply can still dip fares, which is not
possible in a normal taxi model.
2. Fares are generally based on type of taxi used. A bigger car will demand higher fares.
A taxi with a top carriage for luggage can demand higher fare.
iii. The diagram is shown below

The entry of UberX can shift demand and supply curves. While the exact results are not
possible it is not wrong to expect supply to increase as more taxi drivers join Uber. This
is shown as a right shift of the supply curve. The result is lower prices , and a rise in
ridership.

Lower prices and higher quantity will expand the surplus. The expansion is shown in red.
The demand curve may change overtime as people realise that taxi is cheaper than
before. A change in pattern of consumption can cause demand to rise, which will have
dynamic multi period effects on the market. We only look at one time static effect.
Answer 3:
i. Price elasticity of demand measures the ‘responsiveness of demand to price changes’ A
demand elasticity value of -0.8 leads to two inferences:
 A negative sign shows that taxi rides area normal good. As the price of taxi rides rises, their
demand will fall, ceteris paribus.
 The absolute value is less than 1, which makes this an inelastic demand.
With the introduction of UberX, elasticity rises, so that demand is now relatively elastic as the value
exceeds 1now.
Determinants of demand elasticity. (Csun.edu., n.d.)
 Greater are the number of substitutes, higher is elasticity.
 The elasticity of luxuries is often elastic, while necessity goods have inelastic demand.
 Over the long run, as we allow more time for consumers to adjust elasticity becomes more
elastic.
As ridesharing is introduced, consumers have more choices. This makes demand more
elastic, shown in a rise in value from .8 to 1.2
ii. Consider the diagram below. The free market price or taxi fare is P*, which is considered
‘high’ . As a result fares are ‘capped’ at P1, which is lower than P*. Since the free market

price can’t be charged anymore it causes deadweight loss, or inefficiency in the market .
This is the loss of consumer and producer surplus.
Dynamic pricing isa stratgy/ model thatuses demand supply model on real time basis. It s
dynamic in the sense thatit updates demand and supply every second. This model
obviates the need for capping fares as a free fare can be less than P1 sometimes. With
lower demand and/or higher supply we can have P2 as the freely determined fare.
(Dynamic pricing, n.d.)
This model constantly arrives at an equilibrium fare that is dynamic. It determines fares
to be different for same distance/route, taking into consideratin different time and
traffic conditions, and quantity of drivers available (supply). Sucha system reduces
deadweight loss to zero, likea free market equilibrium does.

REFERENCES
Clayton, Christensen, C. M., Raynor, M. E., & McDonald, R. (2015). What is Disruptive Innovation.
Retrieved August 30, 2017, from Hbr.org: https://hbr.org/2015/12/what-is-disruptive-
innovation
Elasticity. (n.d.). Retrieved May 30, 2017, from Econ.ohio-state.edu: http://www.econ.ohio-
state.edu/jpeck/H200/EconH200L5.pdf
Fonseca, M. (2014). Guide to 12 disruptive Technology Examples. Retrieved August 29, 2017, from
Intelligenthq.com: https://www.intelligenthq.com/technology/12-disruptive-technologies/
Gallo, A. (n.d.). A refresher on price elasticity. Retrieved August 15, 2017, from Hbr.org:
https://hbr.org/2015/08/a-refresher-on-price-elasticity
Help.uber.com. (n.d.). Retrieved August 28, 2017, from Dynamic pricing:
https://help.uber.com/h/34212e8b-d69a-4d8a-a923-095d3075b487
Impact of Shifts in demand and supply. (n.d.). Retrieved June 3, 2017, from Econport.org:
http://www.econport.org/content/handbook/Equilibrium/Impact-.html
Price floors and ceilings. (n.d.). Retrieved August 24, 2017, from Econport.org:
http://www.econport.org/content/handbook/Equilibrium/Price-Controls.html
Supply and demand. (n.d.). Retrieved June 1, 2017, from SSC.wise.edu:
http://www.ssc.wisc.edu/~scholz/Teaching_101/Lecture3.pdf