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

Sandy And NYC: It’s All About the Surge

Our kids have been super excited since yesterday afternoon that school has been canceled  for today.  Waking up this morning and looking around they were a bit surprised to see that it seemed to be neither blowing nor even raining outside.  That got us into a good conversation about why Sandy is a dangerous storm for New York City.  In the Northern hemisphere hurricanes rotate counter clockwise due to the Coriolis force.  With the center of the storm supposed to be passing South of us, that means we have very strong onshore winds.  These winds essentially push the ocean towards the city.

So the real danger for New York City are not the wind nor the rain but the storm surge.  Think of it like the ocean rising up.  As that higher sea water level is forced into the narrow harbor it rises even more (same volume of water but less area, so greater height).  Now to get a sense of just how much water this storm is moving take a look at these tidal surge predictions which show probabilities for 6 feet or more above normal tide levels:

As you can see there is a 40-50% chance of this happening later today around Manhattan.  If you want to play around with the surge levels, you can play around with this terrifying surge predictor created by NOAA.

Now you have to keep in mind that this is surge above normal tide.  To make matters worse, tonight is a full moon and we are expecting a high high tide to begin with.  If you have been to various parts of the waterfront at high tide you know that we don’t have a lot of room to spare.  If the surge gets above that we will have flooding.  How much?  We won’t know until it actually happens, but right now the models don’t look very reassuring. We have taken our car out of the underground parking garage and put it in a parking lot and we have also started to clear out our basement.

If you want to watch the swell rising you don’t even need to leave your house.  As long as you have power and Internet, you can check out the live data from the New York Harbor buoys here (the Harbor Entrance, about 15 miles out) and here (in the Harbor, right off the Battery).  You can also see more at this handy NOAA Sandy Quick Look page that pulls a bunch of buoy data together and shows plots of normal predicted tide versus actually observed water levels.  Also shown in each chart is a purple line labeled HAT, which stands for Highest Astronomical Tide.  It’s the highest water level that has been observed in the absence of a storm.  As you can see we will be very much above that.

Good luck to all of us here in New York and along the shore.

Update: This is the Hudson already breaching its banks near the Standard Hotel (picture taken by Fred)

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Posted: 29th October 2012Comments
Tags:  hurricane Sandy New York City tides surge