Essay On Disruptive Technologies, UberX, And Price Elasticity Of Demand.

i. What is the meaning of the term “disruptive technology”?

ii. List 2 examples of a disruptive technology and briefly explain in what way it has been disruptive to the existing market.

i. Compare the cost of a one-way trip from Deakin College (Burwood) to Melbourne’s CBD using a taxi, with using an UberX. List both fare costs and provide a source where you retrieved your information from.

ii. Identify and briefly discuss 2 factors that help to explain the difference in the cost of using a taxi and an UberX.

iii. Consider the point-to-point transport market before the introduction of UberX. Use a fullylabelled demand and supply diagram to represent the point-to-point transport market when only taxis operate. (You do not need to use actual data for this diagram). Show the consumer and producer surplus available in this market.

Using the same diagram, illustrate the effect on demand and/or supply following the introduction of UberX. Explain the changes you have made including any changes to consumer and producer surplus. 

i. It was estimated by the ACT Government (2015) that the price elasticity of demand for taxi services without ridesharing services such as UberX, is -0.8. Briefly interpret this price elasticity estimate.

It was also estimated by the ACT Government (2015) that if UberX services were included, the price elasticity of demand for taxi services is -1.2. Again, briefly interpret this estimate and also explain why it has changed.

ii. The taxi industry has heavily regulated fares, with fixed maximum fares, whereas UberX uses ‘dynamic pricing’. Define dynamic pricing in the context of UberX and explain why it is welfare enhancing. [Suggestion – Consider how free-markets allocate scarce resources via the invisible hand of market prices – Chapter 4 Gans et al. Also think about the implications of price caps (ceilings) to market efficiency/welfare - Chapter 6 Gans et al.] 

1. Disruptive Technologies

1i. A disruptive technology is a relatively new term and has no spcific and precise definition. It is commonly known as ‘a new emerging technology that unexpectedly displaces an established one’(Fonseca, 2014).’ As the name suggests such a ‘disruptive’ technology often findsa place by disrupting/ disturbing the existing technology. The newertexchnology is accepted easily as it is more efficient and sometimes easy to adapt. It may not be a proven technology and may lack experience, but its newness and uniqueness finds many takers. The word was coined in 1997 in The Innovator’s Dilemma by Clayton M Christensen, a Harvard School professor.  (Clayton et al., 2015)

ii. Since the first time this term was used in 1997, many innovations and newer technology have been termed disruptive. Some of them died as they were not applicable on wider levels, while others sustained and have nbeen used and improved over time consistently. Two prominent and successful ones include:

Artificial intelligence is now finding multple users in fields as diverse as medicine, to robots.

Self driven vehicles are another disruption to driver driven cars. They obviate th eneed for drivers and find applications in war ravaged areas where armymen can be saved from landmines and enemy shootings, despite being able to deliver food, weapons and other essentials to warring areas. The savings of labour involved in everyday driving and the scope for zero accident deaths is another application that is pushing this technology further.   

2: i The following fare is based on start point: Deakin College (Burwood) and end point : Melbourne CBD.

Fare for a Silvertop taxi ride:  $37

Fare for UBer X ride: $32-44

Source: SilverTopTaxi: https://www.silvertop.com.au/ ; Uber: https://www.uber.com/en-AU/fare-estimate/

ii. Notice that while a simple taxi gives exact values for the fare, Uber does not do that. It gives a range because the actual fare depends on real conditions like traffic available taxis and number of people looking for taxi, and the actual idling time. This way each operator uses a different model that explains the different fares. Even when start and stop destinations are same the fare vary due to :

Differences in model used. This model can be explained in terms of the determinants of demand and supply of taxis. A simple taxi operator typically uses distance an time of the day, along with car size ( perhaps) to determine fare. The model is static in nature. Uber uses dynamic pricing model that updates demand and supply on real time basis. 

2. UberX and the Point-to-Point Transport Market

iii. Using a simple demand supply model we have equilibrium at P* and Q*. With surpluses as shown. The efficiency is maximum as welfare = sum of producer and consumer surplus is maximised.

iv. The introduction of UberX affects supply initially. As more drivers join Uber, the supply of taxis will expand. The supply curve shifts downwards. We are now lower in prices and more quantity of taxi rides in the market for tax rides. It is possible that demand also increases as people want to experiment with a new service. But it is not clear if total demand will rise or some simple taxi riders will shift to Uber. The effect on demand is thus unclear and ambiguous. The supply effect is clear and expected and that is why we talk about it.

The new lower price will improve consumer surplus, as part of initial producer surplus is transferred to the consumer. The producer himself will benefit as his surplus expands despite some transfer to consumer. The expansion in producer surplus is shown in red.

3i. Price elasticity of demand is defined as the (Csun.edu., n.d.)‘ degree of responsiveness of demand to price changes’. Demand can be elastic or inelastic depending on the absolute value. A negative sign means that the good obeys the law of demand; price and demand are inversely related.  A value of -0.8 shows an inelastic demand.

When we introduce UberX, elasticity changes to become more elastic as the value exceeds 1 now.   Price elasticity of demand depends on many factors, some of which are as follows:

• Elasticity is directly related to the number of substitutes available. Ifa good has more substitutes its elasticity is higher as consumers have the option of shifting from consumption of this good to substitute goods.  
• The nature of the good affects elasticity. Luxury goods have elastic demand, while necessity goods have lower and inelastic demand.
• The time period allowed to alter consumption also affects elasticity. If we are in the long run, giving more time to consumers to alter their consumption due to price changes, demand will be elastic. In the short run changes in consumption are tougher making demand inelastic.

The rise in elasticity for taxi rides is sensible and rational as UberX gives more choice/ substitutes to riders. This makes demand more elastic, as seen in a rise in its value from 0.8 to 1.2, keeping the negative sign intact.

ii. The diagram below uses a simple demand supply model, where the free market price/fare is P*. Since P* is too high, a lower cap is fixed at P1. This causes a deadweight loss or a loss of efficiency. It also creates shortage of taxis, where some riders are forced to go without taxis as drivers refuse to take them at a fare of P1. The riders who do get a taxi are happier as they pay a P1 that is lower than P*. Thus some are happy and some are unhappy with P1.  Overall society suffers.

Dynamic pricing is a system of setting prices using demand supply model on real time basis. It’s dynamic nature refers to the constant changes in demnd and supply that are incoporated in the system. This system can come up with a fare lower than P*, at some time if demand is lower or supply is higher. The fare is not fixed at all, and changes very time a rider requestan app. The fare is calculated the second demand is created/ generated via the app. There is no rrom for capping the fare here as actiual fare can be lower than P* or even P1 at times. Since the fare is not fixed, there is no sense in calling the fare high or low. (Dynamic pricing, n.d.)

In the diagram below we shows a fare of P2 determined by S2 and D2. This P2 is even lower than P1. The new demand and supply curves are based on distance/route, idling  time and traffic conditions, and quantity of drivers available in the vicinity of demand generated. This dynamic aspect of the system reduces deadweight loss as the fare is determined by demand and supply with no interference from artificila caps/limits.

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: https://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: https://www.econport.org/content/handbook/Equilibrium/Impact-.html

Price floors and ceilings. (n.d.). Retrieved August 24, 2017, from Econport.org: https://www.econport.org/content/handbook/Equilibrium/Price-Controls.html

Supply and demand. (n.d.). Retrieved June 1, 2017, from SSC.wise.edu: https://www.ssc.wisc.edu/~scholz/Teaching_101/Lecture3.pdf