How elasticities affect Uber passengers and drivers

See Passengers May Pay a Lot More. Drivers Won’t Accept Much Less. by Austan Goolsbee. Excerpts:

"Yes, surge pricing — the practice of raising prices when demand is high — makes many people feel irate. But what people actually do is what is important. The most comprehensive study of rider behavior in the marketplace found that riders didn’t change their behavior much when prices surged. (Like most major quantitative studies about Uber, it relied on the company’s data and included the participation of an Uber employee.)

Passengers were what economists call “inelastic,” meaning demand for rides fell by less than prices rose. For every 10 percent increase in price, demand fell by only about 5 percent.

Drivers, on the other hand, are quite sensitive to prices — that is, their wages — largely because there are so many people who are ready to start driving at any time. If prices change, people enter or exit the market, pushing the average wage to what is known as the “market rate.”

That’s what always happens when there are no barriers to entry in a market. In 1848, for example, at the start of the California gold rush, the first miners made about $20 per day, on average. The historical data shows that was at least 10 times more than the wage for workers doing what I would classify as similar activities — stone cutting and brick laying — in New York at that time.

Over the next eight years, so many people moved to California searching for gold that miners’ average earnings fell to $3 a day, minus expenses — barely more than they could have made if they had been cutting stones in New York.

What killed the gold rush wasn’t the lack of gold — production tripled over that time. It was the entry of so many competing miners that drove average earnings down so low that most of them barely made enough to stay in business.

And so it is with ride-share drivers today. Another study, by a New York University professor and two Uber employees, found the same dynamic: Higher prices increased driver incomes, but only for a few weeks.

As new drivers entered the market, attracted by higher wages, the average driver had to spend more time waiting for fares. Average pay returned to the level economists refer to as “the outside option” — the pay level of whatever else the drivers could be doing if they weren’t driving for Uber or Lyft.

If for many ride-share drivers the next best option is delivering for an outfit like Domino’s Pizza, or working at a fast-food restaurant, then average pay for the drivers will likely to end up around minimum wage, too."

"average raw earnings for UberX drivers of about $15 per hour, before projected deductions of about $8 per hour."