Monday, January 6, 2014

Uber and Economics versus Business

In another insightful piece, Megan McArdle describes one way that business pricing models differ from pricing from naive economic models. Uber's pricing mechanism matches supply and demand at a time and place in real-time. So, when supply is limited, e.g., a cold New Year's eve, the suppliers are accused of "gouging." Echoing long understood economic principles, she writes:
When demand is very high, and supply is very limited, the right thing to do is let prices rise. This performs two functions: It ensures that available supply is distributed to people who want it pretty badly, and it can attract more supply into the market.

But the she adds the insight:
We do not like market transactions made under duress, even if the seller is not responsible for the duress. Merchants in disaster areas often charge less than they could because they know that the goodwill costs will exceed the profits from maximizing their markup.

Sometimes the actors in real life stubbornly refuse to behave the way our models assume.


  1. "Merchants in disaster areas often charge less than they could because they [s]know[/s]HOPE that the goodwill costs will exceed the profits from maximizing their markup."

  2. Organizations are tasked to take assets from their current state and bring them to a higher-values use. On a cold New Year's Eve, a consumer will hold the value of a warm car ride at a higher value than a day in mid-summer. Economically speaking, providing a more “expensive” alternative to walking knowing that supply is limited but demand will be there is reason enough to raise the price.

    Expecting consumers will pay for products or services differently in circumstances which are out of the control of either the consumer or a goods or service provider may make sense from an economic point of view though business as a result may suffer. To a consumer, consistency in pricing is important. If they notice constant fluctuation in pricing they are likely to be turned away from that organization, especially if they perceive price changes as being taken advantage of. It is likely that the business may gain in the short run but lose out in the long run because of unpredictability of pricing.

  3. It’s interesting when we think about pricing related to Uber, we are typically considering it from the position of the rider, because we are likely a rider in this scenario. However, how pricing is structured is actually as much for the drivers as it is the riders. In the case of Uber's dynamic pricing model, it is not only designed to benefit the driver, but to preserve the experience of the customer.

    In his article, A Deeper Look at Uber's Dynamic Pricing Model, Bill Gurley describes Uber's demand curve as highly elastic (Gurley). This supports their reasoning for "surge" pricing during times of high demand. In situations of high demand or extenuating circumstances, Uber raises its prices in order to motivate more drivers in its marketplace to fulfill requests. Uber went in this direction after it learned that many of its requests were not being fulfilled. The increase in pricing was successful in getting more drivers to fulfill these orders during times of high demand.

    For customers, Uber raised prices in order to intentionally reduce demand, demonstrating that the response to price changes that was also highly elastic (Gurley). In this case with both sides being highly elastic, the dynamic pricing model is designed to balance both the supply and demand.


    Gurley, B. (2014). A Deeper Look at Uber's Dynamic Pricing Model | Above the Crowd. Retrieved February 24, 2016, from

  4. Uber and Economics

    Uber has been around since 2009 and has presented itself as a market-maker both politically and economically. Passengers can now take advantage of technology which has not been around much longer and can add one more option to their local travel needs on a world-wide basis. Like any new product or service, pricing remains flexible as markets gain historical data and price points become more accurate. A key element to sustainability is to adapt pricing strategies which promote market development. Market-penetration pricing has allowed Uber to gain recognition in a positive way but price gouging may have an opposite effect. This is a risk that Uber must manage to remain competitive. It is likely that unbridled pricing tactics at a local level will spread like cancer across potential markets elsewhere.

    Uber must recognize that as markets will price themselves out, the client can trust that Uber oversees pricing limits to remain trustworthy and reliable. Just like their drivers must have and maintain a certain standard, so too should its pricing structure. Clients and future clients should have the confidence to know that their ride will never be more than a certain cost per mile in particular geographic area.
    If a single driver is allowed to price Uber right out of single market, then Uber should expect future clients to look elsewhere for reliability and assurance.