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Alto Taps Uber's Consumer Surplus

by Roger Lanctot | Aug 20, 2019

In a paper published by the National Bureau of Economic Research, four researchers using ride data provided by Uber determined that for every dollar spent by Uber riders in four selected cities in 2015 there was $1.60 in consumer surplus created. The researchers then roughly estimated that this translated to $6.8B in consumer surplus for all of 2015 in the U.S. for Uber.

https://www.nber.org/papers/w22627 - Using Big Data to Estimate Consumer Surplus – The Case of Uber – National Bureau of Economic Research

Consumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (dictated by the demand curve) and the total amount that they actually do pay (i.e. the market price). Given Uber’s $5.2B second quarter loss, the NBER researcher’s findings suggest ample room for Uber to raise prices.

The large consumer surplus suggests that Uber’s customers would not respond negatively to price increases. The real challenge for Uber, though, is its inability to control the quality of the service it is delivering since it neither owns its cars nor directly employs its drivers.

Newly minted ride hailing competitor Alto, though, can deliver a superior experience at a slightly higher price since it owns its vehicles and treats its drivers as employees.

When Uber got into the taxi business with its ride hailing app the intention was to capitalize on all of the weaknesses of the legacy taxi industry such as old cabs, surly drivers, high costs, awkward payment processes, lack of transparency, and overall inconvenience. Unfortunately, Uber introduced its own shortcomings such as cancelled rides, demand-based pricing, unpredictable availability, and unpredictable vehicles (age and reliability) and driver behavior.

Uber essentially created a competitor to the taxi industry by routinely undercutting taxi fares. But both operators were hobbled by employing drivers who were not employees.

While these two transportation sectors are locked in a battle to dominate ad hoc transportation services across the globe, Alto has arrived with the intention to overcome all of the shortcomings of both operators while delivering a reliable, safe, and convenient transportation service. Alto is offering (in Dallas today) on demand transportation in owned vehicles with employee drivers.

Currently operating more than 50 new vehicles in the Dallas market – expecting to expand to as many as 100 by year’s end – Alto offers a subscription-based service ($12.95/month) including:

  • Ride anytime, anywhere – access to members only ride times
  • Exclusive invites to member events and access to member perks program
  • Direct line to always-on support team

Alto further distinguishes itself by offering such control elements to the passenger as heating and air conditioning, lights, music choice, route choice, and driver interaction. All Alto cars are 5-star safety rated and inspected. The company’s drivers use Google Maps, which the company regards as safer than navigation apps such as Waze.

Alto also accommodates guest users, but can’t offer the same guarantees of vehicle availability. The bottom line is that Alto alone among ride hailing operators is in position to offer a guaranteed quality of service – something Uber, Lyft, DiDi and the rest cannot offer with drivers acting as contractors.

More importantly, Alto capitalizes on the massive vulnerability of the ride hailing sector as it currently operates, which is the substantial consumer surplus – the delta between what Uber and Lyft charge and what consumers are willing to pay for a pleasant and reliable ad hoc transportation service.

Alto has the cure for what ails the gig economy. The service will boot up in new cities in 2020, according to Founder and CEO Will Coleman.

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