That is my latest column for Bloomberg, here is the method:
Uber calculates figures for surge pricing at times of high demand, but it rounds off. So a computation of market conditions that might lead to a surge price that is 1.249 times higher than normal fares is rounded down to 1.2, but 1.251 would be rounded up to 1.3. Yet the initial, unrounded 1.249 and 1.251 estimates represent almost the same underlying market tightness.
Using data from Uber, the authors therefore could see how the demand for Uber varied with surge prices that vary (say from 20 percent to 30 percent above normal fares) even when market conditions are roughly constant.
Here is the source:
A new paper by Peter Cohen, Robert Hahn, Jonathan Hall, Steven Levitt…and Robert Metcalfe…
They conclude UberX produces about $6.8 billion in consumer surplus a year. My caveat:
If anything, this method underestimates the worth of Uber, as it doesn’t capture what economists call “option value.” Let’s say you walk home with a guy or gal late at night, hoping something nice will happen. But you’re not quite sure, as he or she might make the wrong noises about a particular political candidate, and then you would wish to bail out quickly. Uber would be the safety net. Most of the time you don’t end up using the service or recording a transaction that would count for this study, but you can start making plans because you know you have Uber as a fallback.
Or consider those urban residents who have ditched their cars altogether. They know they can take Uber to the local market if they need to, even if most of the time they have not run out of milk and dog food. Similarly, the existence of Uber is helping some localities economize on mass transit expenditures.
The study also doesn’t measure how Uber might help get the U.S. to the next level of market innovation, which in this case might mean a network of on-demand, self-driving vehicles.
Do read the whole thing.