Chicago’s Booth school surveys select Economics faculty (the IMG panel) on a variety of questions. Panelists are emailed a question and respond electronically, if so moved. They are asked to state whether they agree, strongly agree, disagree, are uncertain etc. as well as provide a level of confidence and, if they wish, some words of explanation. Here is one of the questions:
Using surge pricing to allocate transportation services — such as Uber does with its cars — raises consumer welfare through various potential channels, such as increasing the supply of those services, allocating them to people who desire them the most, and reducing search and queuing costs.
The correct answer to this question is: it depends. See below for the explanation. Back to the IMG panel. What is its purpose? According to the web site:
This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.
Yes, but what is the underlying population? The IMG site does not say, instead it summarizes the cv’s of the sample:
The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President’s Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.
This is the high table of Economists, a group so select that the sample probably is the population. Why bother with the remarks about sampling?
How did the panelists respond to the surge pricing question? One strongly agreed with the statement but with a level of confidence of 1 (which I think is the lowest). This panelist also provided an explanation that makes clear that the reported confidence level was incorrect. Another, offers an `Agree’ with level of confidence of 3. Why not declare `uncertainty’? Or is the panelists trying to say: generally true but with some exceptions. The other responses suggest busy people trying to be helpful (recall Truman) on a task that is low priority for them.
Only one panelist provides an answer that can be interpreted as `it depends’. That panelist reports being uncertain with a level of confidence of 10. This panelist also provides an explanation:
`Consumer plus producer surplus should rise but in the absence of competition consumer surplus may not. With competition consumers will gain.’
Two make things concrete, consider a monopolist who faces two states of the world characterized by two demand curves: peak and off-peak, with off-peak state occurring most of the time. Now compare consumer surplus in two scenarios: same price in both states of the world, different price in each state. In which scenario will consumer surplus be higher? Which is a lovely intermediate micro question! In addition, if buyers are liquidity constrained, a price mechanism will not efficiently match rides to riders who value them the most.
I think the answer to the question posed reveals less about agreement on policy than the default assumption of the responder about the nature of the underlying market (passenger transportation).
4 comments
August 10, 2015 at 1:00 pm
afinetheorem
Why are we assuming absence of competition?! I think we should be analyzing this assuming a fixed size existing competitive fringe of taxis (with quantity=F) that prices (at price P) at above Uber’s (let’s assume flat) marginal cost (UbMC). Let offpeak demand be such that at P, F rides are demanded. At peak demand, without Uber, G>F rides are demanded, price remains at P, and there is rationing based on luck in hailing the cab (consumers willing to pay more than P are randomly selected from the WTP distribution). Note that this assumption means that the slope of residual demand for Uber is equal to the slope of overall demand.
In the short run, assume no taxis exit from Uber entering. Then at peak Uber strictly improves consumer welfare (if MR=MC below P, all people will demand at that new price buy a taxi and everyone is strictly better off, yet if MR=MC above P (“surge pricing”), the same fraction as before ride taxis and get the same consumer surplus, while there are also some people who ride Uber when before they got no taxi at all). Offpeak, demand for Uber is zero unless they price below P, so again every rider is weakly better off. Since all riders are weakly better off, welfare under whatever Bergson-Samuelson welfare function you want (and not just consumer surplus!) improves. To the extent that the major fixed cost in taxi provision is medallions, whose cost are sunk, the exit assumption I made is reasonable.
August 10, 2015 at 3:27 pm
rvohra
Dear Kevin
We' as in the royalwe’ (as opposed to wee) are not assuming anything. Hence, my answer: it depends. You could argue, as you did above, that Uber competes with taxi’s so it would be incorrect to model Uber as a monopoly.Observe though that the question asked about transportation services in general with Uber offered as an example. Thus, while Uber may face short run competition of the type you assume, it does not follow that all unnamed transportation services are in the same `boat’.
rakesh
August 11, 2015 at 12:55 pm
afinetheorem
Fair point! And this is not the first poorly posed question at IGM (although the project in general strikes me as a very useful exercise, since media reports will inevitably write “A says X while B denies it!” regardless of underlying consensus.
August 11, 2015 at 11:04 pm
maysonicwrites
Given that in some markets, cartels of Uber drivers exist, who manipulate supply in order to provoke surge pricing, it is likely that consumer surplus may well decline with provision for surges.