Uber’s Surge Pricing: Illegal or Avoidable?
The concept of surge pricing isn’t foreign to the businesses around the world. Surge, or dynamic, pricing refers is one type of pricing strategy in which businesses alter their product prices to meet supply and demand levels. Though people may not realize it, surge pricing happens in many sorts of ways, whether it be the price of firecrackers increasing at the tail-end of June to more expensive dinner items on weekends at restaurants. Essentially, this concept refers to the prices of goods increase during “peak times”, or times when people demand a particular item or product the most.
One such example in the modern day would be Uber. Uber is a popular, and albeit somewhat new, ride-sharing company, where buyers (riders) are matched with potential sellers (drivers) based on multiple criteria, such as start location, final destination, rating, number of passengers, etc. During high demand times, Uber prices have been known to go up. For example, around the Halloween season, many adults celebrate by going to bars downtown, and would prefer the comfort of a private taxi over public transportation or the risk of drinking and driving. However, during these times, there aren’t often enough Uber drivers to compensate the needs of all of the buyers, and thus prices rise steadily to a point where the number of drivers equals the number of riders willing to pay a certain price. At these times, prices for a single ride can often double or triple, leaving some riders with a thinner wallet and others with lack of transportation.
This concept relates to idea of market-clearing prices and matching markets from class. The market consists of these riders and buyers. Initially, each buyer has a valuation (or the maximum he or she would be willing to pay for a ride back home). At times like these, riders will be willing to pay much higher than their original price. Thus, as demonstrated in class, the price of the seller can keep rising until there are an equal amount of buyers willing to pay for a driver’s ride. Although we have only dealt with markets where there are equal number of buyers and sellers, this mirrors the matching markets concept from class. Since some buyers’ values for a ride will be surpassed at a high enough price, the market effectively shrinks until there are an equal amount.
Although this may be basic economic theory and technically not yet in illegal in the United States to institute surge pricing (though it is illegal in some countries like India), Uber can change the way so it benefits all parties involved. Namely, Uber can analyze past historical data to determine a rough estimate of the number of buyers on a given night, and re-route some drivers to work in these high-density places during peak times. For example, if we consider a given Saturday night in San Francisco, there are likely to be lots of rides requested. As such, it doesn’t make sense for there to be an even number of drivers wandering around in Fremont or Sunnyvale, when they could easily be driving customers in the city.
From Uber’s perspective, analyzing this data is worth their time and money, because they would be able to maximize the amount of riders they get, effectively increasing the company’s revenue. At the same time, drivers get paid at a constant hourly rate and reimbursed for gas expenses, so they have nothing to lose by going to a different area. If anything, they could gain money off of tips. Finally, the riders would be the most benefited because they have access to a once scarce service and a way to get to their final destination. It’s a win-win situation for all parties involved. Even more importantly though, it eliminates a need for such surge pricing.
Resources: https://fee.org/articles/in-defense-of-ubers-surge-pricing/, http://science.sciencemag.org/content/352/6289/1056