Question

Ride-hailing apps have changed the market for private transport in Singapore. Unlike traditional taxi operators, whose fare structure is fixed in advance, ridehailing apps use surge pricing, and fares can change significantly during peak periods.

(i) Some commuters complain that surge pricing during peak periods harms consumers. Using a supply and demand model for rides, discuss the economic benefits of using surge pricing, rather than fixed fare structure pricing for trips. Support your answer with a relevant supply-demand graph.

(ii) Briefly explain what determines short-run, versus long-run, supply elasticity in the private-hire market. Give an example of a business decision that would increase short-run supply, and a business decision that would increase long-run supply.

2018-Jul Q1a

Answer 1

i. Different timings of the day has different demands for taxies. Peak time like morning hours around 8 to 10 and evening from 6 pm onwwards till 10 pm have heavy demand. These ride-hailing apps use this differennce in demands(elasticties of demand) and hence can charge higher prices. As shown in the figure a below, even high prices charged from p1 to p2 reduces demand very less, which shows relatively inelastic demand. It also means that revenue will be more during this time and hence peak hours are used fully.Gap in quantity Q2-Q1 is much smaller for bigger price change gap between P1 and P2..

Figure b shows that for a small change in price in non peak hours, quantity demanded will be less as people may prefer public transport as it will easy to get seats withount much hassle and hence prices are kept low. Gap in quantity Q2-Q1 is much larger for smaller price change from P1 to P2. Refer fig. b below.

ii.Factors determining elasticty in hire taxi market:

short run: Availibility of taxies and drivers and public transport.

long run: evolving city markets, automobile policies of government rchanging taxi/car prices.

Business if looks at long run profits, ease of entry and exit for new firms, governments approach towrads public transport will be the key to decide long run supply.