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Monthly Archives: December 2014

Economics and PR of surge pricing

Sharing economy taxi services like Uber and Lyft sell themselves on increased efficiency. Any car can become a taxi, thus decreasing the cost for such a service, while increasing the number of people able to make an income from driving others around. Surge pricing is a key part of this strategy, by increasing the revenue drivers can make in high use times, while increasing the cost for riders, the goal is to optimize the supply/demand curve for taxis to where there a more drivers and less riders, but everyone remains happy (drivers make more, riders can get home).

Surge pricing has been extremely controversial, with users surprised by $400 rides home. To Uber and Lyft’s credit, they have improved their notification system warning of surge pricing, and while the final price can’t be certain (traffic conditions, etc.), ignorant consumers cannot replace good economics. And surge pricing is good economics. On rainy nights or Saturday evenings, finding a taxi has been a notorious impossibility. The reason for this may be counter to our economic assumptions. Cab drivers (non-uber drivers) as studied in New York City, operate with a goal in mind. In general, when they meet that goal, they stop driving for the day. On busy days, they meet the goal faster, so fewer cabs stay on the road. Surge pricing encourages these drivers to stay on the road longer because the improved windfall is greater than driving the same amount of time during non-peak periods.

However, this brings us to the PR challenges of surge pricing. In Australia, when a hostage situation in Sydney terrified the downtown area, Uber instituted a A$100 minimum price on rides. Uber’s claim here was they were encouraging drivers to enter the market and help people get home. This would be the same approach for New Year’s night, using high prices to get more drivers on the road. But unlike New Year’s, no one chooses to be out and stranded during a hostage crisis. Uber’s surge pricing preyed on people stuck because of terrifying and unpredictable events – events that stalled alternative transportation plans and increased the need to be a home and safe.

Uber particularly has received negative press even prior to this regarding surging pricing. As such, someone should have pointed out that unanticipated events should treat surge pricing in a different way, not because of economics, but because of the PR. For Uber, the cost of surge pricing during the hostage tragedy was arguably higher than the profit made. Instead, Uber could have found other ways to increase driver revenue – even going so far as to forgo their cut of each ride, increasing driver profits without increasing prices. Since Uber’s matchmaking technology is automated, the marginal price for each rider should be almost nothing. Thus, Uber could show how important and valuable its service is through smarter occasion pricing rather than blind economics.