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Now getting to the economic modeling of the surge pricing mechanism.Let’s imagine a regular weekday. Uber customer is able to get a taxi at any given point at a time for an affordable price.On the Graph N we draw a stable market situation. Supply and demand are at the normal level. Uber customer is able to open the app and get taxi at any given point at a time for an affordable price. So the equilibrium is at the point E — the intersection of D and S curves. Let’s now imagine there’s a boost in demand after a popular music band’s concert. That’s when the surge pricing takes place: the demand curve moves up to D1 and price increases in X times up to P*. High prices stimulate drivers to accept the rides and the supply increases accordingly. The supply quantity moves up along the S curve, and we get a new equilibrium at E1.Here two notes about the equilibrium should be made. Firstly, some drivers will not respond to the surge price. They feel it is worthless, as the surge price is only a temporary tool. So, the quantity of supply increases only to some extent. Secondly, not all passengers are willing to accept the surged price. Some of them may choose other options and means of transport. That’s why the equilibrium is unstable and moving around between E and E1.Now there are enough drivers on the road to meet the demand, so the surge pricing stops. Graph 3 below shows that the price goes back to the initial level P, but the supply cannot do the same quickly. The opportunity cost of driving is lowered. If a driver decided to leave all the alternatives and work, he is more likely to stay on the road longer even if the surge pricing is stopped. Thus, we get the new supply curve S2 and the new equilibrium E2. Over some time, the situation will be stabilized and both demand and supply will go to the initial level.Economic influence of shared economyArising shared economy platforms, such as Uber or AirBnB, brought challenges to the established operating principles of many markets. Regarding taxi industry, transaction costs and barriers for the new entrants used to be high. Nowadays the old model is being disrupted by platforms which connect producers with consumers directly. There’s no need to process numerous ride requests, maintain the car fleet or pay regulatory fees for the Uber company. As a result, time, money, and effort needed to facilitate the deal between customer and driver are decreasing.The most painful barrier for taxi industry is license, which is a governmental permission to work in a given industry. For example, in New York City, taxi medallions sell for more than $1 million dollars each. These entry barriers are being eliminated, so sharing economy opens new opportunities for small entrepreneurship. Those car owners, who would be kicked off the market by expensive licenses, now can offer their services at much lower costs. Low-income segment of workers is able to operate at a legal market, and it can help to decrease poverty.Also shared economy platforms facilitate information sharing and reduce asymmetry. However, it is important for regulatory entities to ensure that the efficiency gains will be maximized and distributed fairly among all involved parties.However, established firms are fighting to preserve outdated business models, specifically because they benefit from entry barriers that keep new competitors away. Taxi companies in Europe claim that Uber does not comply with the regulations and therefore creates unfair competition at the market. So Uber is now prohibited or restricted in Belgium, France, Germany, Italy and Spain. Such decisions have intensified the debate around Uber15. discrimination conceptLast year Uber announced the (investigation) intention to change pricing policy to a more complicated one. New tariffs would consider such factors as whether a passenger travels to a wealthy district. This is an example of price discrimination practise, i.e. charging different “types” of consumers different prices for the same product or service, in order to exploit their willingness to pay. Price discrimination may have some positive effects on the overall society’s welfare. It contributes to providing the necessary services and products where needed, which in case of Uber means reduced customer waiting times. Lower income or poorer consumers especially benefit from price discrimination as they now can afford to purchase the service ( the same time, the new pricing will lead to unavoidable tension with drivers. Their main complaint is that Uber increases its profit margin by exploiting consumer surplus along with keeping the drivers’ stake low. Another problem is that, unlike in a monopoly situation, taxi industry offers variety of options to consumers: web-based taxi services, traditional taxi, car sharing etc. This may also cast doubt on the success of the new pricing model.

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