Monday, January 26, 2015

Et tu Uber?

Uber betrays the very principles that made it so successful by capping pricing during the blizzard.  When these price ceilings create shortages, I hope they can explain to their customers why they were left out in the cold.  

The cap comes after an agreement struck between Uber and the New York City Attorney General’s office in January 2014 that required Uber to limit prices during“abnormal disruptions of the market”, including emergencies and natural disasters. Uber also announced a national policy for its price limits during those emergencies. 
In an email to Bloomberg, Uber said the following:
Dynamic pricing will be capped and all Uber proceeds will be donated to the American Red Cross to support relief efforts. 
The company later clarified to TechCrunch that the cap will be in place in any market that has declared a State of Emergency. 
While Uber plans to limit dynamic pricing during this storm, the company has had a bad history with emergency situations and surge pricing. In late 2012, Uber received criticism for raising fares during Hurricane Sandy. (The agreement with the NY AG came in part as a result of Hurricane Sandy backlash.)
I feel like taking Uber out of my textbook; or adding them to the chapter on how to keep regulators at bay.

13 comments:

  1. I like your “Julius Caesar betrayal” reference in the title of this post. I am completely undecided- Of course it is a classic example of supply and demand that has been pointed out by the many varying media outlets covering this story. There was a video on Bloomberg’s site where the hosts were getting quite heated. But then you get into regulations- it is illegal to price gauge in state of emergencies. So it does make legal sense, but at the very least, it is a great PR stunt. Also, their rivals Lyft cap their prices during times like this. Overall, I think they are trying to save face after the backlash of coverage they got after hurricane Sandy. If the prices rose too high that could make people go right over to their competitors Lyft; so they would still be losing money. I feel this ties right in to the beginning of chapter two where you talk about wealth- this transportation company found a way to make money by using the concept of taxis and technology and turning it into a higher-valued use. To quote your book, “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists of tracing the consequence of that policy not merely for one group but for all groups.” This may become of those times that while angering some people now, the price cap will get them more users later on.

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    1. I hate it when you quote me back at me.

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  2. This is a test comment. See:

    https://productforums.google.com/forum/#!category-topic/blogger/l0dY5ad3S-c

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  3. As Matt Levine wrote, uber should be entirely ad-funded, and then make the ads louder when it snows.

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  4. After reading about price ceilings and the article you referenced “Why You Can’t Get a Taxi” in your textbook, I think you should add Uber to both chapters! I have lived in the country most of my life and rarely used a taxi however I have on many occasions taken horse-drawn cabs which “seem to have mostly escaped regulation” according to Megan Mcardle’s article. I always wondered how they determined their rates. Regardless, price-controls may be good for some things e.g. Politicians salaries, commodities, gasoline, interest rates, rent control etc. but it’s all gone too far and many of the old rules and regulations such as NYC (“GBL”) “need” to be rescinded. It appears that Uber ignored their own business strategy to collect data and have the ability to set fairs in the current system during peak times and sold out to play politics. I think by doing so, Uber knowingly fell into the hidden-cost fallacy. Was it a move to keep “regulators at bay”, or was it an ethical dilemma caused by the rational actor paradigm –
    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2014). Managerial Economics; A Problem Solving Approach (3rd edition). Mason, OH: South-Western Cengage Learning

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  5. “Economics, provides us a consequential defense of high prices by comparing them to the implied alternative”(Froeb, 2014). I’m a bit confused by this entire topic of dynamic pricing/ surge pricing in the case of Uber, because their alternative is “No Cars Available if they did not raise their prices during certain times”.(Blog.Uber.com)

    Q: How many of you have tried to hail a cab to get out of NYC between 4:30-5pm. News flash, it’s nearly impossible because of the change in shift. During a storm, cabs are impossible to hail, late nights present the same issues. There is a convenience in knowing I have options, other than a yellow NYC cab and often with options comes a cost.

    Uber drivers are independent contractors whom have full control of their work schedule. The need for drivers between certain off peek hours was extremely high, while Uber experienced a shortage of drivers. A high demand for car service on Friday, Saturday, late nights, and holidays created a supply demand imbalance. Uber had no choice but to offer their independent contractors an increase /night differential rate, a motivational reason to leave their families, at the wee hours of the night or on holidays.

    Ubers' model seems fair, I can’t seem to distinguish the difference between what the travel industry does during peak times, special holidays and what Uber does. Hotels, airlines, quadruple their prices during certain events, times of the months and no one seems to mind. Why is this acceptable?
    Ubers' situation is unique in that the supply curve moves to the left at the same exact time the demand curve is moving to the right. Creating a price catalyst increase supply and will fix the problem in the short.

    “Dynamic pricing changes are driven algorithmically when wait time are increasing dramatically and unfulfilled request start to rise. Raising the price temporary and internationally, reduce the demand, while decreasing prices increase supply” (Blog.Uber.com).

    References:
    Froeb, McCann, Ward, Shor: (2014) Managerial Econonics. A Problem Solving Approach, Ohio: South Western Cengage Learning
    http://blog.uber.com/dynamicpricing

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  6. It is interesting that not only will dynamic pricing will be capped but that all Uber proceeds will be donated to the American Red Cross to support relief efforts. Uber’s NY agreement was a result of the warning issued by the New York Attorney General just prior to this last major snowfall, which stated that, “General Business Law prohibits excessive increases in prices of essential goods…” This does indeed include transportation.

    Uber’s agreement to limit prices during “abnormal disruptions of the market” defies the basic principles of supply and demand but could this benefit the company in the long run? Besides the obvious avoidance of breaking laws against price gouging, there are other benefits to limiting prices and supporting relief efforts. “An organization's investment in CSR is believed to create value not only for society but also for the organization itself.” Uber can market their donations as cause-related and this philanthropic behavior will no doubt be used as a promotion. The timing could not be better as rumors of an upcoming Uber IPO are circulating.

    References:
    A.G. schneiderman warns against price gouging during winter storm juno in new york state. (2015, Jan 26). Targeted News Service.
    Alsmadi, S., & Alnawas, I. (2012). Consumer rights today: Are they in business or out of business? International Journal of Marketing Studies, 4(1), 159-167.

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  7. Funny that you used Uber in your book, Managerial Economics: A problem solving approach, as an example of a corporation that makes money and offers high quality as a result of alleviating the inefficiencies caused by price ceilings! Someone in a position of power must have read your book.

    By agreeing to limit their prices during "abnormal disruptions of the market," Uber is not following the rational-actor paradigm. This action will cost the company money and quality of service and there is not immediately visible incentive.

    The only explanation is that there is an incentive that is not obvious. Either the incentive is a long term result of this action due to public approval of the policy, or there is an intrinsic motivation on the part of the corporate decision maker. Could the incentive be knowing that they didn't overcharge people in times of crisis? Is there such a thing as altruism? I understand that lowering prices increases demand and causes a shortage of taxis, but in this case, there is already a shortage so this may not be part of the decision making process for this particular case.

    Froeb, L., McCann, B., Shor, M., Ward, M. (2014). Managerial Economics: A problem solving approach. Third Edition. South-Western Cengage Learning: Ohio.

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  8. Economists focus on the search for efficiency within processes of making them more efficient. It is tempting during the search to generate a blind side, not realizing that business are carried out with people.
    Über-in this case, have had taken the decision as an institution to establish capping pricing in an atmosphere of "abnormal disruptions of the market", has it become one of the best movements or investments in public relations in the company.
    We must not forget that as part of the human nature exists the emotional component, in this case this Uber movement could generate gratitude and/or community loyalty, tending to make him/she seen as a responsible corporate citizen to the community in which him/she serves.
    Let’s not forget that the transactions are made voluntarily, in some cases and for some time the will of the individuals can be positively or negatively affected towards a particular firm’s image, which can provoke the community to favor one firm over another, competing for the same market. Which will directly affect their profit positively or negatively.
    More than a cohesion towards the thoroughfares, this Uber movement, can be interpreted as a large investment in public relationships, promotion or advertising of a citizen corp. responsible towards their community.

    References:
    Froeb, McCann, Ward, Shor: (2014) Managerial Econonics. A Problem Solving Approach, Ohio: South Western Cengage Learning

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  9. It would be interesting to see LYFT’s reaction to the agreement between Uber and New York City. Uber’s market cap is 20 times higher than LYFT. You can certainly see that it is much easier for a $40 billion dollar (NY Post Business Section, 2/23/2015) company such as Uber to control prices during an abnormal disruption of the market. It would be much more difficult for LYFT to accept such conditions because its only has a market cap of $2 billion dollar (NY Post Business Section, 2/23/2015) and is 20 times smaller than Uber. In addition, we need to consider the owners and their cost of equipment. An Uber, or Lift driver is self-employed, the cost of operating their vehicle and the risk that is associated with what is a “abnormal disruption of the market” is much higher. It will also cause more drivers to reconsider how much work they will perform or where they will perform it. We see this happen in New Orleans during Katrina when the government limited true valuations of meeting demand. Instead of letting businesses rush to meet the demand by allowing the market to make it beneficial for them to compete accordingly to fill demand it instead made it more expensive by controlling prices which had an impact against the cost of transportation as well as distribution.

    Eric

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  10. I believe what Adam Smith is saying by:

    “Smith wrote as eloquently as anyone ever has on the futility of pursuing money with the hope of finding happiness”, claiming that such “seductions will never satisfy”. What matters instead is “the consciousness of being beloved”, the meaning of which has weathered through the ages but approximates “authenticity”: wisdom and virtue” http://managerialecon.blogspot.com/2014/11/adam-smith-on-happiness.html

    Has a lot to do with the "invisible hand" so if we apply the understanding that capitalism works best when the "invisible hand" is creating opportunities the it will flow downstream and benefit much more people because of the increase economic activity. Also as illustrated by Froeb, McCann, Ward, and Shor “Wealth is created when assets move from a lower-to higher-valued ones” (Froeb, McCann, Shor, & Ward, 2014) which would increase the firm’s financial which will than support other activities that would benefit others.

    Eric

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  11. This is a very bad decision on Uber’s part. Unlike the New York City taxi market, which is heavily regulated not only in price but also in quantity by the city’s medallion system, Uber is designed to work as a free-market enterprise. While the intent may sound good to cap prices during states of emergencies, the reality is that the city has just created decentives for Uber drivers (who are self-employed and own their own cars) to work. When demand is high, costs rise, generating more incentive for drivers to work in the market. As more drivers show up, the market works its way back to an equilibrium of a normal market balance. This decision will leave more people stranded in the streets of New York because the seller surplus that normally exists for Uber drivers will not exist because the city has demanded that they regulate price. They should revert back to the old policy. Yes, riders would have to pay more for a ride. But most riders would probably agree that paying more (which is actually just a going market rate) is better than being stranded in the streets of New York during the blizzard. That is one opportunity cost that the average, sane person likely would not want to pay.

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    1. I find it interesting that the intent of government intervention - price controls in this situation is prevent individuals from being overcharged or "gouged" in emergency situations. Although this is a reasonable expectation - that those in a time of need would not be taken advantage of, it is counter to several economic principles of a "free and open" economy. On one hand, why should a business owner be prevented from working the supply/demand curve to their benefit when the opportunity arises. The other side of the coin is the business owner's responsibility to society. However, assuming the demand is satisfied regardless of pricing in this case (an assumption can be made that it was since there could have been higher prices but not for the price controls) the same number of people would have been able to be transported to their destination. The inherent benefit to society is not the number of people transported in this emergency but rather the pricing for those people who were transported. One could argue that those who were less able to pay higher pricing are the real beneficiaries of such price ceilings.

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