What is Disruptive Technology in Business?

A disruptive technology in business refers to an innovation which creates a new market and network value. The newly created market eventually disrupts the already existing market and replaces the established market affecting the leading firms, alliances and products. Such technologies are generally developed by entrepreneurs operating outside the market (Ganguly, Nilchiani and Farr 2017).  

Answer ii

            Introduction of Personal Computer is one example of disruptive technology. Prior to this, there are typewriters that are used to type for different purposes. The personal computer driven by new technology displaces typewriter and modifies the way to work and communicate.

            Another known example of disruptive technology is Salesforce. It is a company that specializes in offering Software as a Service (SaaS). This was initially aimed to serve small and medium sized businesses (Selke 2016). Today, it is disrupting the primary provider of Customer Relationship Management (CRM) software. CRM no longer host internal servers.

Answer 2: Uber X and point-to-point transport market

Answer i

            The cost of a one way trip from Deakin College (Burwood) to Melbourne’s CBD using a taxi ranges from $37.39 to $52.35 (taxifare.com.au 2018). The same trip using Uber X costs in the range from $33.92 to $57.94 (taxifarefinder.com 2018).

Answer ii

            The first reason for difference in cost structure is the ridesharing service offered by Uber X. With ride sharing marginal cost of additional customer reduces which allow Uber to charge a relatively low fare. Another factor explaining the difference in cost structure is the taxi prices are regulated having a set maximum level (Matherne and O’Toole 2017). Fare in Uber X on the other hand is variable and fluctuate with market demand and market supply condition.

Answer iii

Figure 1: Point to Point transport market

The market scenario of point to point transport market is presented in figure 1. The given figure is drawn with the assumption that only taxi operates in the market. With absence of Uber X, the market demand curve for point to point service is given as DD. The corresponding market supply curve is SS. The market equilibrium is acquired at E. This is the point where market demand for point to point service meets with that of the supply of point to point service. The triangular area as namely the triangle EP*D in the figure below shows the consumer surplus. The triangle E₁P₁S represents producer surplus in the market. 

Examples of Disruptive Technology

Figure 2 represents the changing scenario of transport market after introduction of Uber X. Uber X is a substitute to tax services. People now have an alternative to taxi service. The introduction of substitute services causes a downfall in traditional transport market demand. Adhere to this fact, demand curve in the transport market swings inward to D₁D_1. Equilibrium in the market occurs below the old equilibrium point. There is an associated decline in equilibrium number of rides and fare in the point to point transport market (Baumol and Blinder 2015). The consumer and producer surpluses change in the market accordingly. The new consumer surplus is given by the area E₁P₁D. The producer surplus reduces to the triangle EP*S.

Answer 3: Price Elasticity and Invisible Hand  Answer i

            The estimated price elasticity of demand for taxi service is – 0.8. The price elasticity measure of demand signifies the direction and magnitude of demand change following a change in price. The measured elasticity thus indicates that if price of taxi service increases by 10 percent, the associated demand for taxi service would be reduced by 8 percent. The demand elasticity measure less than 1 infers that tax service has a relatively inelastic demand.

            After inclusion of ridesharing services like Uber X, the estimate for demand elasticity is obtained as -1.2. That is, now if price increases by 10 percent the associated demand falls by 12 percent. This means the inclusion of Uber X increases elasticity of demand for taxi service. This is because, people now have an alternative to taxi services (Cowen and Tabarrok 2015). The availability of substitute increases elasticity in terms of increasing alternative choice to people.

Answer ii

            Under free market, prices are determined from the prevailing forces of supply and demand. The free market equilibrium occurs where interest of buyers and sellers intersect. Without any regulation free market ensures the efficient allocation of resources maximizing social welfare. The well-being of private parties confirms aggregate well-being of the society. Now, with dynamic changes in demand or supply condition, the market should be allowed to adjust according. It is the mechanism through price that works as an invisible hand to ensure economic efficiency (Bos 2015). On the other hand, if prices are fixed by regulation then market efficiency and social welfare is interrupted due to price rigidity. This can be understood by comparing regulated price of taxi service with a dynamic pricing model of Uber X.

The figure 3 represents the market for taxi service with a regulated price. The equilibrium price in the market is given as P_1. Price might be fixed at this level or anywhere below this. If demand for taxi services increases such as during weekends, holidays or other festive occasions then demand curve would shift outward. The new demand generates an upward pressure on price. In a regulated market price remain fixed at P₁. Then at this price, quantity demand of the service exceeds quantity supplied making people either to wait for a long time or to find some alternative.

Figure 4: Dynamic Pricing for Uber X

The dynamic pricing of Uber X is shown in figure 4. During peak time, there is a hike in fairs. The higher price encourages other drivers to enter so than balance in demand and supply can be achieved. This allows everyone who are willing to pay a higher price enjoy the service.

The welfare comparison two pricing model is presented above. With a static or regulated price there is a shortage of supply at the higher demand. This causes a welfare loss shown by the triangle EE₁F. With a dynamic price however, higher price encourages more suppliers and hence, market efficiency is restored (Gibbs et al. 2018).

References list

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson Education.

Bos, D., 2015. Pricing and price regulation: an economic theory for public enterprises and public utilities (Vol. 34). Elsevier.

Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan International Higher Education.

Ganguly, A., Nilchiani, R. and Farr, J.V., 2017. Technology assessment: managing risks for disruptive technologies. In Managing Technological Innovation: Tools and Methods (pp. 25-54).

Gibbs, C., Guttentag, D., Gretzel, U., Yao, L. and Morton, J., 2018. Use of dynamic pricing strategies by Airbnb hosts. International Journal of Contemporary Hospitality Management, 30(1), pp.2-20.

Matherne, B. P. and O’Toole, J., 2017. Uber: aggressive management for growth. The CASE Journal, 13(4), 561-586.

Selke, S. (Ed.), 2016. Lifelogging: Digital self-tracking and Lifelogging-between disruptive technology and cultural transformation. Springer.

Taxifare.com.au., 2018. Taxi Fare Calculator – Taxi Fare Rates. Taxifarefinder.com., 2018. TaxiFareFinder – Deakin University Melbourne Burwood Campus, Burwood Highway, Burwood VIC, Australia to CBD, Melbourne VIC, Australia using Uber X – Melbourne, VIC, Australia taxi rates.