Megan McArdle did a short post on why surge pricing is the optimal mechanism to clear the market. And also why it might be net bad strategy for Uber. A fragment:
At the core, Uber is not a taxi company; it's a technology company. The company has a lot of data on where its customers are, and where they like to go. That enables some cool stuff: Travis Kalanick, the company’s chief executive officer, told me that Uber can slightly outperform gambling spreads on whether a team will win a home game, just by looking at stadium trips. More practically, data enables them to move cars to where they might be wanted, which means it’s easier to get a car if you are outside the dense urban core. And when demand is very heavy, data enables Uber to dynamically price rides to ensure that cars are always available — if you’re willing to pay.
I love Uber’s surge pricing; it means that we can get a car home on New Year's Eve. Yes, it costs a lot, but the alternative is hoofing it for a few icy miles through some not-quite-safe streets.
But I’m an economic policy journalist, not a normal person. Normal people hate this sort of dynamic pricing, which they call “price gouging.”
This came to a head last week, when a brutal snowstorm on the East Coast kept taxis off the streets. Desperate folks in the New York metro area turned to Uber — and then screamed at the bills they got for hundreds of dollars, even though Uber’s smartphone app seems to have clearly warned them that this was going to happen. Economically illiterate recrimination ensued…
CEO Travis Kalanick posted his reply to outraged customer
Surge Pricing email that just came in and my response. Get some popcorn and scroll down…
————— Forwarded message —————
From: Travis Kalanick
Date: Mon, Dec 16, 2013 at 8:44 PM
Subject: Re: I'm OUTRAGED!
We regularly do surge pricing when demand outstrips supply. Remember, we do not own cars nor do we employ drivers. Higher prices are required in order to get cars on the road and keep them on the road during the busiest times. This maximizes the number of trips and minimizes the number of people stranded. The drivers have other options as well. In short, without Surge Pricing, there would be no car available at all.
Now granted, that the prices are significantly higher. BUT we notify every customer in big bold images in text, which each customer has to confirm in order to request. Furthermore, every customer also had to type in what the multiplier was in order to double confirm that they understood what they were agreeing to.
So, was it expensive. It was, and we wish it wasn't necessary. But if you did indeed take the rides described then you confirmed the price which was very up front, and then entered the multiple you read into a text box in order to double confirm.
Airlines and Hotels are more expensive during busy times. Uber is as well. We don't just charge to make a buck though, we take a small fee of the transaction, but the vast majority goes to the driver so that we can maximize the number of drivers on the road. The point is in order to provide you with a reliable ride, prices need to go up.
If you have other ideas for how to provide a reliable ride during busy times, I am all ears. In the end, Uber is reliable, always, and we will create a system that maximizes the number of people that can get safe and reliable rides. Not surging is saying you shouldn't have the option. Not surging is saying we should be just like a taxi and be unreliable when people need us most. These are outcomes that take choices away from the consumer and make it harder to get around cities – these are outcomes that we put a lot of hard work in to avoid so that at least you have the choice if you want one.
On Mon, Dec 16, 2013 at 5:01 PM, wrote:
Dear mr. Kalanick,
I used to love uber… I have written several blogs about the amazing service and how amazing I thought your company was. Key word, WAS! I called uber on sat. To take me to a show that was 60 blks away, and also called uber to pick me back up to bring me home. I usually get an email with my receipts, but havent received one yet… did a little research and was SHOCKED to see that i was charged $180 each way! That's $360 to go 120 blocks!
I WILL NEVER USE YOUR COMPANY AGAIN! I AM OUTRAGED AND DISGUSTED THAT YOU WOULD JACK UP YOUR CHARGES THAT MUCH BECAUSE OF A SNOW STORM!!!
I hope it was worth losing a loyal customer-like myself! I plan on telling this story to everyone I know and plan on writing about this on my blog!
You should be ashamed of yourself!
Megan links to the work of Duke University's Mike Munger. I agree that Mike is a superb source on this behavioral issue. His Econtalk interview with Russ Roberts explores real world examples of illogical reactions to dynamic pricing. If you don't like 1 hr podcasts, there is a partial transcript and rich resource links to papers on this topic. Abstract:
Mike Munger of Duke University talks with EconTalk host Russ Roberts about the psychology, sociology, and economics of buying and selling. Why are different transactions that seemingly make both parties better off frowned on and often made illegal? In theory, all voluntary transactions should make both parties better off. But Munger argues that some transactions are more voluntary than others. Munger lists the attributes of a truly voluntary transaction, what he calls a euvoluntary transaction and argues that when transactions are not euvoluntary, they may be outlawed or seen as immoral. Related issues that are discussed include price gouging after a natural disaster, blackmail, sales of human organs, and the employment of low-wage workers.
Another Munger Econtalk I recommend is Munger on price gouging.