Taxi Fare Comparison: Uber vs Traditional Taxis

This assignment explores the differences in pricing mechanisms between traditional taxis and ride-hailing services like Uber. It investigates how price elasticity varies with the presence of Uber, suggesting that demand becomes more sensitive to price changes due to the availability of substitutes. The analysis also contrasts the regulated pricing structure of taxis with the dynamic pricing model employed by Uber, highlighting both the efficiency and potential drawbacks of each approach.

Running head: ECONOMIC PRINCIPLE
Economic Principle
Name of the Student
Name of the University
Author Note

1ECONOMIC PRINCIPLE
Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................2
Answer3:....................................................................................................................................5
References..................................................................................................................................7

2ECONOMIC PRINCIPLE
Answer 1:
i) The term “disruptive technology” refers to that type of innovations in technology
which leads to creation of a new genre of market and demand and supply structure and with
time displaces an established traditional market, its products, key players and the alliances of
that market (Fan and Suh 2014).
ii) There are many examples of disruptive technology with progressing innovations
and adaptation to new technologies. Two of such examples are as follows:
a) The invention of telephonic services can be taken to be one of the major examples of
disruptive technology as it completely changed the mode of communication
eventually and replaced the previous telegraphic mode of communication.
b) Another example of disruptive technology is the introduction of the USB drives in the
market for storage of data. Due to their small size, portability and bigger storage
capacities, these devices took almost the whole of the market for CD and floppy
drives (Russell 2012).
Answer 2:
i) The cost of travelling one-way from the Deakin College situated in Burwood to
Melbourne’s CBD in a taxi may range from $37.41 to $52.37 (Taxifare.com.au, 2017).
However, the same distance (One-way) can be travelled in a UberX within the cost range of
$29 to $37, which is comparatively much lesser than that of the fare of taxi in Melbourne
(Uber.com, 2017).

3ECONOMIC PRINCIPLE
ii) It is evident that the cost of using an UberX is much less than that of a taxi, in
general. There may be several factors contributing to this price difference, two of which are
as follows:
a) The convenience of availing the services of Uber and its easy and fast availability has
shifted a major share of the customers from the traditional taxi using sector towards
itself. This may imply that the company is currently experiencing economies of scale
which is making it able to charge lower than that of the traditional taxi sector.
b) The taxi industry has many constrictions like minimum fare, maximum fare and
limited availability, whereas Uber uses the mechanism of dynamic pricing, which
allows it to charge according to demand, thereby keeping its price close to the
equilibrium level, unlike that of the competitor (Gabel 2016).
iii) The point to point transport industry mostly emphasizes on the convenience of the
customers, by enabling the customers travel on their preferred route at the time of their
convenience. The industry has gained immense significance over the years with expanding
commercial connections and people travelling more. Initially, the supply side players of the
point to point transport market included only a few agents, like taxis and hired cars, with taxis
taking the major share of the market (Gabel 2016). With an increasing demand and no other
significant competitors, taxis enjoyed huge market advantages, as can be shown with the help
of the following diagram:

4ECONOMIC PRINCIPLE
P
C S0 S1
E0
E1
A
B
0 Q0 Q1 Q
Figure 1: Demand and supply of point to point transport
(Source: As created by the author)
It is evident from the above diagram, that initially, the taxis being the sole
significant service providers in the market, they faced huge demand in the market. With
limited supply, they charged a high fare, P0 and produced supply of amount Q0, thereby
keeping the market at equilibrium at the point E0. The initial consumer surplus was only of
the amount CP0E0, while the initial producer surplus was considerably high, with P0AE0
being the total producer surplus, which was mostly enjoyed by the taxi service providers
(Mankiw 2014).
P0
P1

5ECONOMIC PRINCIPLE
However, with the introduction of the Uber Company in the point to point transport
market, the number of suppliers increased as the taxi service providers faced stiff
competitions from that of the Uber cabs. The increase in the supply resulted to a rightward
shift of the supply curve, from S0 to S1. Due to the arrival of competition in the market, the
price came down to P1 and the amount of supply and demand increased to Q1, with the
market reaching at equilibrium at the point E1. The consumer in the final market increased
significantly from CP0E0 to CP1E1, while the producer surplus dynamics is ambiguous
though it can be concluded clearly that much of the producer surplus is now enjoyed by the
new entrant in the market, that is, Uber (Mankiw 2014).
Answer3:
i) It was estimated by the ACT government (2015) that in absence of the cab
services of Uber, the price elasticity of demand for the taxi services was -0.8. This in
economic terms imply that with a one unit increase in the fares of the taxi services, the
demand for the same decreased by 0.8 units, that is the change in demand was less than
proportionate to the change in price.
However, from the same estimation, with incorporation of the Uber services, the
same price elasticity was seen to be -1.2. This implies that now, the fall in demand was more
than proportionate to that of the increase in the price. This may be because of the presence of
substitute like Uber in the market as now, with an increase in the taxi fares, unlike before;
people can shift to Uber for transport services (Rios, McConnell and Brue 2013).

6ECONOMIC PRINCIPLE
ii) The pricing mechanism of taxis are highly regulated, with the presence of
ceilings in the forms of maximum fares, while that of Uber is dynamic. Dynamic pricing
mechanism is comparatively a newer method of setting prices, which allows the company to
charge different prices according to the demand dynamics in the market. This means, with
this pricing mechanism, a company can charge higher prices for their product or services in
presence of higher demand in the market and can reduce the prices of the same product in
presence of a lower demand for their product or service. On the other hand, highly regulated
pricing structure induces the sellers to charge a stipulated price, no matter what the demand
for their product is, thereby creating disturbances in the demand and the supply side of the
market (Chen and Sheldon 2016).
The dynamic pricing system shows more efficiency in terms of allocation of
resources and the concept goes at per with the concept of invisible hand in the market
economy, which is assumed to bring the market to equilibrium through the mutual interaction
of the demand and the supply forces. However, due to the absence of any kind of restrictions,
the prices can go up very high in case of high demand and very low at times when there is
very less demand, thereby hurting one of the sides, the buyers or the sellers. Presence of
maximum fare and other price restrictions reduce this risk, especially for the buyers, by
settling a ceiling for the prices that can be charged at any circumstances (Rios, McConnell
and Brue 2013).

7ECONOMIC PRINCIPLE
References
Chen, M.K. and Sheldon, M., 2016, July. Dynamic Pricing in a Labor Market: Surge Pricing
and Flexible Work on the Uber Platform. In EC (p. 455).
Fan, L. and Suh, Y.H., 2014. Why do users switch to a disruptive technology? An empirical
study based on expectation-disconfirmation theory.Information & Management, 51(2),
pp.240-248.
Gabel, D., 2016. Uber and the Persistence of Market Power. Journal of Economic
Issues, 50(2), pp.527-534.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.
Russell, A.J., 2012. First steps on the path to defining disruptive science and technology.
Taxifare.com.au (2017). Taxi Fare Calculator - Estimate your taxi fare. [online]
Taxifare.com.au. Available at: https://www.taxifare.com.au/ [Accessed 2 Sep. 2017].
Uber.com, C. (2017). Get a Fare Estimate in Your City. [online] Uber.com. Available at:
https://www.uber.com/en-IN/fare-estimate/ [Accessed 2 Sep. 2017].