A Defense of Surge Pricing
I’m not defending the company Uber per se, but in my latest FEE article I walk through the logic of surge pricing. An excerpt:
The wonderful thing about our smartphone age is that the dynamic pricing isn’t merely limited to a particular night, but can vary even in half-hour intervals. For example, Uber emailed its users on the morning of December 31 warning them to expect high prices from 12:30 a.m. through 2:30 a.m. It advised people to catch a ride as soon as the ball dropped, or to plan on staying out much later. In this way, people could spread their ride demands out according to their willingness to pay: the people with flexible plans could make way for those who (say) had babysitters they needed to get home to by 1:00 a.m., or for those who really didn’t want to leave right at midnight and were willing to pay extra to leave at their preferred time.
The benefits of surge pricing don’t just apply to car rides. We see the same phenomenon whenever there is a blizzard or flood and the prices of bottled water, canned goods, and batteries shoot through the roof. Consumers in the affected region naturally cry foul, but these unusually high prices are necessary to “ration” the available quantities to the people in need. For example, at regular prices, when the news announced an oncoming blizzard, the first few families to get to the convenience store would clean out the shelves. But if prices jump to several times the usual level, people will be much choosier, leaving bottles of water and other items for the customers who show up later. Furthermore, the high prices will give an extra incentive for people in the surrounding regions to figure out how to deliver more supplies as quickly as possible.
“Uber should do a better job of making its new customers aware of such possibilities before they start their journey.” – RPM
Uber has got a pretty good notification for surge pricing (I first saw it in December, so pre-NYE.)
It literally tells you that “Surge pricing is here” with a description of what a surge price is, how it would impact your Estimate & literally asks you to retype in the Surge Price.
Full explanation:
So I was catching a cab from a hotel in Saigon to Saigon airport, and I saw surge pricing go from 1x (the standard fare) to 2.5x over the course of an hour, I looked outside and clearly their was traffic everywhere so getting a cab was going to be difficult. When i went to book it asked me to ReKey in the surge price (i.e. type in ‘2.5’). So they clearly have went to extreme measures to be 100% upfront about the surge price.
That’s fine Strat, but there was a beginning to my sentence.
And I’m glad to hear it.
If I’m reading the article correctly, Uber did disclose the surge multiplier to Asbury, but he didn’t do the math. (And also, he accidentally requested a premium car, which increased the base rate).
“Like all other riders, Elliott was alerted to last night’s surge before sending for his car. The surge at the time multiplied his normal fare more than seven times, but he said he didn’t realize what that would do to his total fare.”
“… but these unusually high prices are necessary to “ration” the available quantities to the people in need.”
I understand that this answer is tailored to the socialist-leaning folks, but I would like to point out that there need not be any rationing motive to justify surge pricing.
Economics is always about the individual, never about “the collective”; And the benefits that accrue to the many by way of the self-interest of the individual happens THROUGH each individual’s recognition that they can get a resource through other people at an opportunity cost that is lower than if they had attempted to get the same resource on their own.
That is to say, the “network effect” occurs because everyone sees everyone else as a resource.
http://en.wikipedia.org/wiki/Capitol_Hill_Babysitting_Co-op
Krugman’s favourite story about why money printing is a great idea, would probably have benefited from surge pricing. Have we already argued that one on here? I thought we had, but I can’t find it.
The guy charged over $500 for his fare did not know he would be charged that much, but it was because he was not familiar with the app. He mistakenly booked an expensive premium ride, there was a button to estimate the cost, but he didn’t know it was there. There was notification that “surge pricing” was in effect, but he did not understand what that really meant. Perhaps Uber could make it even more obvious, when surge pricing gets over 4 or 5 times a big notice could pop up “Do you realise this fare will cost more than four times the normal fare?”
Uber do offer a 25% refund for novice users caught out by this sort of mistake, so he should get $100 back.
If after reading what surge pricing is, getting an estimate and typing in the surge price you still do not know what’s going on, then there is nothing left anyone can do. Businesses can’t treat everyone like an idiot for the sake of the one in a million .