Economists put a (big) number on the ride service’s consumer surplus in 2015.
The sky is dumping freezing rain, it’s 11:30 at night, and you’re standing on a street corner 15 miles from home. You open your Uber app and see that the trip is going to cost you roughly $50, as prices are surging 200 percent above normal. But you summon the car anyways. In fact, you might not have hesitated to go as high as $100, just to get dry in that comprising moment.
Economists would call that $50 difference—between what you pay and what you’re willing to pay—a “consumer surplus.” They see it as a hard representation of Uber’s value and utility to you, as if you’ve pocketed $50 in benefits on an otherwise wet and miserable day. (Hooray—kind of.)
Understanding consumer surplus is important to businesses and economic policy makers, because it gives them a sense of how much people feel they’re gaining from what they buy. But calculating it in the real world can be pretty hard, because companies don’t have mind-readers who can see how much more we’d shell out for stuff.
Thanks to its surge pricing system and vast collection of user stats, Uber might be a rare exception. Using nearly 50 million individual-level observations, a group of Uber data scientists and university economists have estimated that UberX (the most popular, lowest-cost option of the ride-hailing service) generated roughly $2.9 billion in consumer surplus in 2015 between Chicago, Los Angeles, New York, and San Francisco, the service’s four largest U.S. markets. Their back-of-the envelope calculations, published this week in a working paper for the National Bureau of Economics, suggest that UberX’s overall consumer surplus for the United States in 2015 was $6.8 billion.
If you buy the premise that consumer surplus is a valid way of measuring social gains, that’s super-sized value. (Note that this is a figure that’s distinct from Uber’s mighty morphing market valuation, which could be $30 billion, or twice that.)
There are two crucial starting points to understand how the authors got to these numbers: First, Uber’s surge system is always changing prices to reflect supply and demand. Second, not only does the app register a datapoint every time you accept a ride at 120 percent, or 170 percent, or 500 percent above the base price, but it also knows when you reject those prices.
Armed with unfettered access to those four cities’ Uber usage data, the authors created a “demand curve” at each level of surge pricing, tracing the share of user who still bought rides as prices rose. By drilling down into individual rates of ride completion, they then measured the percent increase in price associated with the drop in ride acceptance at every point on that curve. For example, if 70 percent of users accepted a ride at a base price of $10, but only 60 percent accepted a surge price of $11, then they knew that a 10 percent drop in the share of people who took rides was associated with a 10 percent increase in price. Simply put, they made these comparisons all along their demand curve, which gave a pretty good sense of how many customers were actually willing to pay more—and how much more—at every price point.
Added up between the four cities and extrapolated out to the national level, they got those multi-billion-dollar figures—and also this: “For each dollar spent by consumers, about $1.60 of consumer surplus is generated.”
These figures might be something to consider for cities fighting to rein in the notoriously #disruptive ride-hailing industry. “One day’s worth of [Uber’s] consumer surplus, by our estimates, is about $18 million,” the authors write. “If Uber were to unexpectedly disappear for a day, that is how much consumers would lose in surplus.” Austin, Texas, may be getting a taste of this hypothetical, since it recently saw the departure of Uber and Lyft after a long battle over background checks. (Of course, other ride-hailing services have popped up to fill the vacuum.) “One possible takeaway is that jurisdictions should think carefully if they are trying to make it difficult for ride-sharing services like Uber and Lyft to participate in their area,” says Robert Hahn, a scholar of economics at the University of Oxford and one of the paper’s authors.
To be doubly clear, a loss of consumer surplus doesn’t mean real money goes down the drain—rather, it’s an intangible good that’s evaporating. Regulating Uber with things like licenses and background checks might reduce the consumer surplus when you calculate it this way, but it could also add intangible safety benefits.
By contrast, there are direct external costs to society that the Ubers of the world may very well be contributing to. The jury is still out on whether ride-hailing services are putting more or fewer fuel-burning vehicles on the road. But in some cities they could be creating heavier traffic, contributing to road wear, pollution, and lost productivity. The UC Irvine transportation economist Kevin Roth points out that L.A.’s subway has been estimated to relieve $1 to 4 billion worth of congestion every year in that city, where the share of people riding the subway is relatively low. ”If a few extra vehicles [off the road] can cause that in L.A., it’s not far-fetched that extra Uber vehicles circling around 24-7 will generate congestion costs that wipe out a nontrivial share of this consumer surplus,” Roth says. On the other hand, Uber could be helping people to ditch their cars entirely and take transit more often, in which case its benefits to society could be even larger than the NBER analysis estimates.
The paper doesn’t try to account for these potential impacts, nor for the consumer benefits or harms that came from the taxi industry’s response to Uber’s arrival. It also doesn’t mention the folks who see almost none of Uber’s benefits, and yet still have to deal with its potential costs: people who don’t own smartphones, as well as those who rely solely on public transit, which could be losing riders and revenue thanks to Uber and its ilk.
As ride-hailing shoves its way into a complex transportation ecosystem, the true costs and benefits of its invasion are still being teased out. Imperfect as the NBER study might be, it’s a useful benchmark in that process. For the first time, someone’s put a number on how astonishingly valuable Uber has become to consumers—rather than Wall Street—in its short, explosive lifetime.