Saturday, May 21, 2016

Uber's surge pricing is efficient, but deeply unpopular

So much so that places like Dehli has banned the practice.  In response to these political threats Uber has started trying to educate the public about the benefits of surge pricing.  Here is a "natural experiment" in Manhattan.

In the left panel, on New Year's eve 2014, there was no surge pricing (the algorithm broke down), and wait times tripled while the completion rate was cut to 25%.  The right panel shows the same area of Manhattan following a Ariana Grande concert in 2015.  After the concert let out, fares increased, but there was no change in wait times nor completion rates.

BOTTOM LINE:  surge pricing is needed to bring in supply and allocate rides to those who want them the most.  Without it, supply is too small, and rides are not allocated to their highest valued use.
(Economist article)

4 comments:

  1. Its very useful blog thank you for share this information

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  2. Many were conflicted over the policy of surge pricing with Uber this past year. Surge pricing is the act of increasing prices during peak times. Hall, Kendrick and Nosko (2015) explained that with Uber this process has also allowed them to increase the supply of rides/drivers to meet the needs of riders during these high peak times. During a sold out concert in 2015 market equilibrium was achieved. Uber drivers were able to attract enough drivers (by using the incentive of increased profit) to meet the needs of increased costumers in a popular location.

    This example reminded me of another occasion where surge pricing is a common practice. Buffalo, NY recently created a new waterfront outdoor area to attract more traffic. During its weekly free summer concerts, festivals, or hockey games in the fall, prices of parking lots in the immediate area jump from $2 to over $15.
    While this practice seems unfair it is common. Those unwillinging to pay the price for parking will leave earlier to find free parking or park further away. In the instance of Uber. Customers can see surge pricing is occurring and opt to take other transportation. What consumers are paying for is convenience.
    The consumer who places the most value on the service offered will more than likely utilize the service even with a higher price.



    Hall, J., Kendrick, C., & Nosko, C. (2015). The Effects of Uber’s Surge Pricing: A Case Study. The University of Chicago Booth School of Business.

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  3. Uber has a knack for being controversial and staying in the headlines with their use of surge pricing. Surge pricing tends to be misunderstood by many people, where it is viewed as an opportunist looking to take advantage of folks. However, this really is debatable. In fact, supporters of surge pricing “contend that in a free competitive market, if product prices rise to equalize supply and demand, goods and services will thereby be allocated in a more efficient manner leading to economic efficiency - available supplies is allocated to the most valuable uses first and to lower valued uses later” (Suranovic). A perfect example of this is the latest drama that is surrounding Uber and the “Delete Uber” campaign that is slowing but surely picking up speed and cutting into Uber’s bottom line.
    In response to President Trump’s immigration ban, taxicab drivers in NYC announced a one hour strike on picking up or dropping off customers to JFK that was inclusive of ALL NYC cabbies. So when all of NYC’s cabbies participated in the strike EXCEPT Uber, it was viewed as supporting the immigration ban but even worse – taking advantage of surge pricing. But in order to understand why this is incorrect you first have to understand how Uber works in regards to their drivers. If there is a high demand for rides in a particular area, Uber’s computer system automatically kicks in surge pricing to entice drivers to go to that area. However it’s up to the drivers themselves if they want to, unlike with a taxicab service where they must go where dispatch sends them. In this case Uber turned off the surge pricing (in an effort to support the immigration ban) but drivers still went to JFK because they knew the pickings were plenty (Michael H.). So in this case Uber’s reputation is working against them when they really weren’t utilizing surge pricing for a competitive advantage.

    Suranovic, S. (2016). Surge Pricing and Price Gouging: Public Misunderstanding as a Market Imperfection (pp. 1-27, Working paper No. Edsrep.p.gwi.wpaper.2015.20). The George Washington University, Institute for International Economic Policy.

    H., M. (2017, January 31). #DeleteUber is wrong because it misunderstands surge pricing Posted: 31 Jan 2017, 10:05, by Michael H. [Web log post]. Retrieved February 1, 2017, from http://www.phonearena.com/news/DeleteUber-is-wrong-because-it-misunderstands-surge-pricing_id90554

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  4. "Surge pricing has long been Uber’s Achilles’ heel: during periods of excessive demand, when there are more riders than drivers, Uber increases its normal prices to encourage drivers to flood the zone. Drivers love it, often waiting to sign-on to the platform until surge pricing kicks in, but most passengers hate it and some critics equate it with price gouging" (Hawkins, 2016). During times of high demand for rides, fares may increase to make sure those who need a ride can get one. For riders, surge helps ensure that pickup is available quickly and reliably. For driver-partners, surge means higher fares and a steady stream of ride requests.


    Uber is sticking with surge pricing for now, but Jeff Schneider, one of its machine-learning experts, recently suggested that the company is interested in developing systems that rely on technology, rather than price, to allocate cars.Surge (or dynamic) pricing relies on frequent price adjustments to match supply and demand.When demand in an area spikes and the waiting time for a car rises, surge pricing kicks in; users requesting cars are informed that the fare will be a multiple of the normal rate. Surge pricing is successful for Uber because of the money they can make off customers, but this is something Uber really needs to look into. Customers are left with paying Uber fares that can be triple the price on a normal day, and Uber is losing business because of the refusal from the consumers to pay these prices. When demand is high prices increase.

    Hawkins, A. (2016). Uber is trying to make you forget that surge pricing exists. The Verge. Retrieved fromhttp://www.theverge.com/2016/6/23/12017002/uber-surge-pricing-upfront-fare-app-update-announcement.

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