Some Thoughts on Surge Pricing

I am sympathetic to Uber’s basic argument that surge pricing is the market at work as (a) nobody is being forced to take an Uber and (b) raising prices puts more Ubers out on the street. On Saturday evening, close to the height of the storm I had to go to the Upper East Side to pick up one of our kids. I quickly decided to take the subway which was running on time and only cost $2.50 each way, even though that meant I had to walk about a dozen blocks in the storm. As an avid skier and lover of snowstorms the latter was just a question of bundling up which I did. The walk through a deserted Upper East Side was in fact magical.

But once you dig a bit deeper there are a couple of things worth examining. The first is whether or not people are good judges of what a 10x surge means. I for one would be interested in seeing the results of an AB test that compares announcing a surge multiplier with asking people to also put their destination in and then giving them a fare estimate. My gut is that quite a few people will say “yes” to 10x but “no” when they see $250. Now you might say tough noogies — they should have figured it out but we are creatures full of cognitive biases and so appealing to strict rationality in your customers may be a mistake. Fortunately, this would seem to be easily AB testable.

The second point is a bit more technical but equally important. A uniform price mechanism works extremely well with commodities which have a single unified market. As price goes up supply increases and demand drops until the two are in balance. With transportation the situation is trickier thought because during a snow storm an Uber that’s in downtown is not really relevant for someone trying to get a ride in uptown. It is not one market but many local mini-markets. In some of these it is likely that demand exceeds supply at any price level (supply simply doesn’t have enough elasticity). In those instances price increases do more to transfer wealth than to clear the market. By the way, I am not making a value judgement here — just clarifying the economics.

In this context it is worth mentioning that the fixed base charge and per mile incremental charge on taxis is also deeply flawed. It is not really effective to ask a taxi driver to work for the same rate at night in a snow storm as on a sunny afternoon (which is why there were very few taxis on the road). There are no really easy answers here and this is very much a debate worth having as long as we are willing to get down into the nitty gritty of it.

Posted: 19th December 2013Comments
Tags:  markets economics uber pricing surge

Newer posts

Older posts

blog comments powered by Disqus
  1. spreadn3bulouz reblogged this from continuations
  2. 27janrd reblogged this from continuations
  3. weatherall reblogged this from ahandsomestark
  4. ahandsomestark reblogged this from continuations
  5. jeremydwyer reblogged this from whitneymcn
  6. vdp83 reblogged this from continuations
  7. case-custom reblogged this from continuations
  8. jryu reblogged this from continuations and added:
    Good post by Albert on surge pricing. I’d add that the story here is not just about the slope of the supply curve but...
  9. whitneymcn reblogged this from continuations and added:
    Best thing I’ve read on the surge pricing kerfuffle(s).
  10. continuations posted this

Newer posts

Older posts