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The Problem with "Surge Pricing"

Lisa Chow did a story for Morning Edition about Uber's "surge pricing". Similar articles have been written recently. They all raise the question about whether it's fair to charge people a fare for a ride that's higher than the originally advertised price.

Now, "surge pricing" is ubiquitous. It costs me more to ride the DC Metro during rush hour than during the middle of the day. It costs me more money to drink a beer at the bar after 7pm than it does during Happy Hour. It costs me more to see a movie in the evening than it does in the morning. If I wanted to go to Las Vegas for New Year's, my hotel room would cost significantly more for the holiday than it would for the week following.

All of these are examples of adjusting prices to put supply and demand in equilibrium. Metro wants me to ride at off-hours to avoid overcrowding on their trains. The bar wants me to get there earlier and fill barstools rather than not go at all. The hotel wants to maximize its profit on a night it knows it's going to be sold out.

What makes all of these examples different from Uber is that the surge is predictable. I know what hours I'll pay more for my Metro ride. I don't show up at the movies not knowing what the price is going to be. And typically I book my hotel at least a few days (if not weeks or months) in advance to lock in my rate.

With Uber, I go out on the town, and when it's time to come home, pull up the app, and the price could be just about anything. It's not based on certain hours and I can't book my ride in advance to lock in a rate. This is where Uber is getting into trouble with customers like the woman in the NPR story who called the pricing model "ridiculous". It's not ridiculous, it's just implemented in a way that makes them look bad.

Gasoline prices are a great example of something that adjusts frequently in price and which consumers don't like paying more for when they've previously paid less. Gasoline prices similarly "surge" after storms and natural disasters, just like Uber prices, and consumers make similar accusations of "gouging" just like they do with Uber!

But even in the fuel market, savvy consumers can "hedge" against price swings by buying options in the financial markets that essentially lock-in a price for a fixed period of time. It makes more sense on a commercial-scale, but individuals can do it if they really wanted to or were really concerned about volatility. Even then, gasoline prices don't double or triple in a matter of minutes.

There's a solution for Uber though. The specifics would need to be ironed out, but generally it would look like this...

Just like I can lock in a hotel rate or airfare by booking in advance, Uber can let me book a one-way or round-trip in advance and lock in a price. They have data and algorithms and they know when demand is likely to peak. I might be willing to book a ride in advance at 1.5x the regular rate if I fear the price might be 2x by the time I need the ride. I don't like surprises, and I suspect many of Uber's customers don't either.

Now, the driver would still need to be paid whatever the "going" surge rate is, in order to keep the correct number of them on the road, and sometimes Uber might lose money on a pre-booked ride, other times they might make money. If their prediction model works correctly, it will all come out even in the end, but from the consumer's point-of-view, the predictability of knowing what the service is going to cost would be reassuring. All of this happens behind the scenes in any case, and the customer would never need to know these specifics.

The economist in me fully understands the reason why they've implemented surge pricing. And even knowing full-well its purpose, I still don't like it as a user. That's exactly why they need another solution and should probably stop doubling down on their position that surge is here to stay.


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