We’re bringing back price theory with our series on Price Theory problems with Professor Bryan Cutsinger. You can view the previous problem and Cutsinger’s solution here and here.
Share your proposed solutions in the Comments. Professor Cutsinger will be present in the comments for the next couple of weeks, and we’ll post his proposed solution shortly thereafter. May the graphs be ever in your favor, and long live price theory!
Question: Uber offers a membership option that entitles members to a percentage reduction in the price of Uber rides. Evaluate the following two statements:
1- Suppose an Uber customer is indifferent between becoming an Uber member or paying the standard Uber ride price. This customer will never spend less, and, in general, will spend more on Uber rides if the customer becomes a member. (Assume that Uber rides are a homogenous good.)
2- Introducing the membership option can never reduce the number of Uber rides this customer takes.
READER COMMENTS
Gabriela Gomez
Feb 12 2025 at 9:10pm
Considering that a customer uses Uber equally, if they are indifferent between membership and non-membership, their expenditures would be the same. It is likely that the discount will make the membership worthwhile only if the customer uses Uber enough to justify the membership. The membership might result in the customer spending more money if they take more rides (because of the membership). Their Uber usage could determine how much they spend over time (if they use it enough to offset the membership cost), or how little they spend (if they already use Uber rarely).
Members are usually offered discounts and perks as a way to encourage them to use the service more. By promoting the membership, Uber hopes to increase the number of customers who use Uber over alternative transportation services. However, there is a possibility that Uber usage may be reduced by membership fees or the psychological effect of having already paid for membership. In the case of Uber, for example, customers may use it less frequently to avoid “wasting” their membership fee, or if they feel they are paying for something they don’t use as much, they may opt for alternatives more frequently.
John Hall
Feb 13 2025 at 2:27pm
Assume the consumer has diminishing marginal utility over rides and the usual rationality assumptions.
Let’s start with #2. Marginal costs are determined by the price per ride (assuming that is fixed for simplicity) only. Marginal costs ignore the fixed cost of the membership. The discount means that the marginal costs are lower for the person with the subscription. With declining marginal utility, this means that they will choose more rides with the discount compared to without the discount (the marginal cost is lower, so to have the same marginal utility of ride purchases you have to purchase more). And of course, this is conditional on them choosing the subscription option. If it isn’t optimal to choose that option, then they won’t. So either they will take the same number of rides or more.
On #1, I think Gabriela has the general logic correct. If the customer is rational, they won’t pick the subscription option and spend less. They spend more because they would take more rides. They would only be indifferent if the cost of the subscription and discount are such that it works itself out that way in the interaction with their utility.
Oneeyedman
Feb 13 2025 at 7:33pm
Can we assume that Uber can’t price discriminate? Or can Uber charge a different set of a prices, pre-discount, to members and non-members?
Bryan Cutsinger
Feb 13 2025 at 8:17pm
You can make whatever assumptions you like! My answer won’t emphasize price discrimination, but I’d love to see what you come up with!
TA
Feb 14 2025 at 1:39am
1. TRUE – Membership will not reduce minimum spending and often increases total spending.
2. MOSTLY TRUE (but not always) – Introducing membership typically increases rides but could reduce rides in rare cases due to income effects or budget constraints.
Bryan Cutsinger
Feb 17 2025 at 8:02pm
Can you elaborate on how you reached these answers?
Gracie Plonisch
Feb 15 2025 at 6:11pm
If a customer is indifferent between becoming an Uber member or paying the standard ride fare, they will only choose the membership if they use the service often enough to justify the cost. The membership makes financial sense if Uber is the dominant or most convenient option in the customer’s area. If alternatives such as Lyft are available with competitive pricing, they may want to alternate between which company they use and may not want to commit to a single company. Becoming a member would likely cause the customer to use Uber more so that they can fully take advantage of the membership. Since the customer is indifferent, they will never take less rides as a result of introducing the membership option. A customer who is already paying for a service won’t stop using it just because another option becomes available; rather, if they use the service frequently enough, they may opt for the membership and increase their overall spending since they would then be incentivised by the fixed cost of the membership to take more Uber rides.
Bryan Cutsinger
Feb 17 2025 at 8:07pm
I like the complication you included about competition in the ride-share market! I hadn’t considered it. You should think more about how the membership may affect the incentive to use Lyft after purchasing the membership with Uber.
Is the fixed cost of the membership what incentivizes the choice or the lower marginal cost per ride the membership fees provides?
Gabrielle Wojciechowski
Feb 25 2025 at 3:35pm
Statement 1 says that if a customer is indifferent between becoming an Uber member or paying the standard price, they will never spend less, and will generally spend more with the membership. This isn’t always the case. If the consumer is indifferent, the membership price and the gain from the lower ride prices are the same, so they are even. If they only take a few rides, the membership cost may be more than the savings, and they will end up spending more than they would if they did not have the membership. But if the customer takes more rides, the savings from the discount may be more than the membership cost, and they will spend less. While the statement is true for occasional riders, it is not true for frequent riders who would pay less with the membership.
Statement 2 suggests that adding a membership option will never cause a decrease in the number of Uber rides a customer takes. This isn’t always true. Membership options that offer discounts can motivate customers in some cases to use the service more frequently. However, some customers might be reluctant to pay the membership fee if they believe they won’t take enough rides to make it worth it.
Oliver Kus
Feb 25 2025 at 8:36pm
1. If they don’t care either way about paying each time or purchasing the membership, they will only purchase the membership if they ride sufficiently to cover its cost. The marginal cost per ride is less because they’ve already covered the fixed cost of the membership, so they’ll take additional rides to get their money’s worth. Because they were already willing to spend money on a particular number of rides at full price, they will not spend money on fewer rides after they receive a discount. Rather, they will keep their spending level or spend more because of the reduced per-ride price.
2. Since membership lowers the marginal cost of every ride, it eliminates a disincentive to taking more rides. The consumer already had an incentive to take rides at the regular price, so making a less expensive option available won’t cause them to take fewer rides. If anything, the savings on costs spur more use, so the number of rides will be the same or more but never fewer.
Isabella Shiflett
Feb 26 2025 at 4:25pm
1) If a customer is indifferent between getting a membership or paying the regular price, their expected spending is the same or higher with the membership. However, once they join, the lower per-ride cost might lead them to take more rides, increasing their total spending. Even if they don’t take more rides, they won’t end up spending less than they would have without the membership; they could even end up paying more.
2) Since a membership lowers the price per ride, it usually encourages people to take more rides, not fewer. With the cost per ride decreasing, there’s no reason for the customer to cut back on rides, so the number of rides they take will either stay the same or go up, but it usually won’t go down.
Noah Anderson
Feb 26 2025 at 7:08pm
1: If a customer is indifferent about becoming an Uber member, it means that their expected value of becoming a member is the same as paying the normal price for rides, so the membership offers a lower price of rides, but the customer’s usage of Ubers will probably stay the same. Them being indifferent means that they wouldn’t always spend more because they would probably spend about the same or possibly even less if they had a membership because either way because they see the two options as equal.
2. This statement says that giving the customer the option for a membership will never lead to the customer taking less Ubers. I think this isn’t exactly true because never is too strong of a word to use. There will always be someone that goes against the norm, but generally, this statement should hold true with the majority since membership options will generally offer discounts and perks that make them the cheaper option.
Jack Steckel
Feb 27 2025 at 1:00pm
The conclusion for statement one would be true as the customer either spends the same (if they keep consumption fixed) or spends more (if they take advantage of the lower marginal price.) This is due to the fact that the customer is indifferent meaning he will join/pay for uber rides no matter what the cost is.
In regards to question #2 it would hold true as under standard assumptions, the introduction of the membership option cannot lead to a reduction in the number of rides taken. Due to the fact that the membership fee induced by uber would either increase or maintain the amount of rides but never decrease it.
Ana Cecilia Carvalho
Feb 27 2025 at 3:59pm
The first statement is true. If the customer is indifferent between becoming a member and not becoming one, it means that the total cost should be the same for both options. In this case, the costumer would spend the same amount in either of the two options. However, if the marginal cost of uber rides are lower, because of the membership pass, this costumer might be willing to get more rides than he would before, which would make him spend more money than before.
The second statement is true. The membership lowers the marginal cost for each ride, which would make the customer get more rides.
Riley Smolin
Feb 27 2025 at 8:07pm
I think whether the membership is worth it depends on a person’s lifestyle and how often they use Uber. For someone who relies on Uber frequently, the membership could be beneficial. For someone who only uses Uber occasionally, it might not make much of a difference. If they need a ride, they would likely order one regardless of having a membership.
I agree with the second statement and how it could be a way to maintain or even increase the number of Uber rides because of the lower marginal costs.
Triston Grant
Feb 27 2025 at 10:32pm
I initially used AI to help me think through these questions, and this is what I came up with: For Statement 1, if a customer is indifferent between membership and standard pricing, their expected total cost is the same either way. However, once they commit to the membership fee, they will at least spend the same amount as before, if not more. Since Uber rides are a homogeneous good, their demand wouldn’t drastically change, and they might even take more rides to justify the membership cost, increasing overall spending. For Statement 2, the AI argued that the introduction of a membership program could actually reduce the number of rides a customer takes. While a lower per-ride cost might encourage more usage, the upfront membership fee could deter budget-conscious customers who feel they must commit to it but cannot afford both the fee and their usual ride frequency. In such cases, total Uber rides could decrease.
But then I got to thinking, For Statement 1, if the per-ride discount is large enough, frequent riders could actually spend less overall despite paying the membership fee. Someone who already takes many Uber rides might see a noticeable reduction in total costs. As for Statement 2, the sunk cost fallacy suggests that once someone pays for the membership, they may feel compelled to use Uber more to maximize their investment similar to how gym memberships encourage attendance. Even budget-conscious customers might increase their ride frequency, perceiving each trip as being cheaper due to the discount. So instead of reducing rides, the membership could actually maintain or even increase usage.
Tommy Pino
Feb 28 2025 at 3:12pm
Statement 1: When the statement says that the customer is “indifferent,” it means that the price for an Uber ride is the same no matter how often or not a consumer uses Uber. A membership with Uber might cause the customer to spend more on rides because of discount offers and due to rides being more cheaper. This statement is true.
Statement 2: This statement says that an introduction membership with Uber will not reduce the number of rides a customer takes. A membership can reduce the price of a ride, which will lead a customer to spend more on rides. This is not fully guaranteed. In my opinion, I do not think this is true because an introduction membership will show what it has to offer. If the membership is worth it, then the customer will become a member of Uber. If not, then the fixed cost will lead a customer to use Uber less.
Gabrielle Eaton
Feb 28 2025 at 11:51pm
Considering the consumer would have to pay for the membership and the price that is offered every time they need an uber, even with the reduction, I think the consumer will end up paying the same price as a non member.
Comments are closed.