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As the adage states, time equates to money. This is particularly apparent in the transport industry, where individuals are willing to spend more for non-stop flights, rapid trains, and other methods to reach destinations swiftly.
Nevertheless, gauging the exact worth individuals place on their time can be challenging. A recent study co-authored by an MIT economist leverages ride-sharing data to uncover various implications of customized pricing.
By examining a European ride-sharing service that auctions its rides, the researchers discovered that individuals respond more to costs than to delays. They also noted that users are willing to pay extra to save time during working hours, and that paying more to eliminate waiting significantly boosts business revenue. Furthermore, certain consumer segments display a distinctly higher willingness to pay elevated prices.
Specifically, when individuals can bid for rides that arrive sooner, the extra amount above the baseline price the platform can charge increases by 5.2 percent. Concurrently, the difference between the offered amounts and the maximum consumers are willing to spend diminishes by 2.5 percent. In economic terms, this generates additional “surplus” value for businesses while reducing the “consumer surplus” in these exchanges.
“A key figure in transportation is the value of time,” remarks MIT economist Tobias Salz, co-author of a paper outlining the study’s outcomes. “We encountered a scenario that provided a very straightforward method for examining this figure, where the worth of time is evidenced by individuals’ travel choices.”
The research paper, “Personalized Pricing and the Value of Time: Evidence from Auctioned Cab Rides,” is set to be published in Econometrica. The authors include Nicholas Buchholz, an assistant professor of economics at Princeton University; Laura Doval, a professor at Columbia Business School; Jakub Kastl, a professor of economics at Princeton University; Filip Matejka, a professor at Charles University in Prague; and Salz, the Castle Krob Career Development Associate Professor of Economics in MIT’s Department of Economics.
Assessing how much individuals are willing to spend solely to save time is not a simple task. Transportation is one domain where this can be accomplished, though it is not the only area. Consumers might also pay more for, for example, a fast pass to skip long queues at an amusement park. However, data in those scenarios, even when accessible, can be influenced by various factors. (Moreover, the worth of time should not be confused with how much individuals pay for hourly services, ranging from accountants to tuba instruction.)
In this instance, the researchers received data from Liftago, a ride-sharing platform in Prague featuring a unique characteristic: It allows drivers to bid on a passenger’s ride, with the wait time for the vehicle’s arrival being one of the elements involved. Drivers can also specify their availability. By analyzing how passengers assess offers with differing wait times and costs, the researchers can see precisely how much individuals are paying to avoid waiting, keeping other factors constant. Altogether, they reviewed 1.9 million ride requests and 5.2 million bids.
“It’s like an eBay for taxis,” Salz explains. “Rather than assigning a driver to you, drivers bid for passengers’ rides. This system enables us to directly observe how individuals make their decisions. Their valuation of time is shown through the wait times and associated prices. In many scenarios, we cannot observe this directly, making it a very clear comparison that eliminates numerous confounding variables.”
The data set allows the researchers to explore various aspects of customized pricing and its influences on the transportation market in this context. This yields a series of insights, alongside findings regarding time valuation.
Ultimately, the researchers determined that price elasticity — meaning how much prices fluctuate — ranged from four to ten times more than the elasticity of wait times, indicating individuals are more focused on avoiding high costs.
The team ascertained that the overall valuation of time in this context stands at $13.21 per hour for users of the ride-sharing platform, though the researchers emphasize that this is not a universal measurement of time value and is contingent on this context. The study also reveals that bids rise during work hours.
Additionally, the research uncovers a division among consumers: The upper quartile of bids assigned a value to time that is 3.5 times greater than the value of the bids in the lower quartile.
There is still the matter of how much customized pricing benefits consumers, providers, or both. The results show that the overall surplus increases — indicating business advantages — even as consumer surplus diminishes. Nonetheless, the data depict a more nuanced reality. Because the top quartile of bidders are paying significantly more to reduce wait times, they bear the majority of the costs in this system.
“Most consumers still gain benefits,” Salz states. “The consumers affected negatively by this have a high willingness to pay. The source of welfare improvements is that a majority of consumers can be integrated into the market. However, the downside is that the firm, by understanding each consumer’s limit, can extract surplus value. Welfare rises, the ride-sharing platform captures most of that, and drivers — interestingly — also gain from the system, even though they lack access to the data.”
Economic theory and other transportation research alone would not necessarily have forecasted the study’s findings and various subtleties.
“It was not evident in advance whether consumers benefit,” Salz notes. “That is not something you would ascertain without examining the data.”
Although this research may particularly interest companies and individuals involved in transportation, mobility, and ride-sharing, it also fits into a broader body of economic research concerning information within markets and how its availability, or scarcity, impacts consumer behavior, consumer welfare, and market operations.
“The overarching theme of the research is really about information regarding how to locate trading partners and their willingness to pay,” Salz remarks. “My general interest lies in these types of information barriers and how they influence market outcomes, consumer impacts, and how they can be leveraged by companies.”
This research was partially funded by the National Bureau of Economic Research, the U.S. Department of Transportation, and the National Science Foundation.
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