Uber’s ride-matching encounters a wee bit of dynamic pricing resistance

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 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.


Cowen on Sumner on Krugman on the UK

Tyler Cowen writes:

And here is a remark on timing:

I find it astonishing that Krugman and Wren-Lewis, having done post after post in 2012 describing how the UK does have real fiscal austerity in 2012, are suddenly happy to now argue that a relaxation of fiscal austerity in 2012 is the “reason” for GDP recovery in… erm, 2013.

Don’t let the emotionally laden talk of “Three Stooges” or “deeply stupid,” or continuing problems in the UK economy, distract your attention from the fact that this one really has not gone in the directions which the Old Keynesians had been predicting.

This whole set of linked essays is recommended, though I'm finding it challenging to unravel all the logic. Monetary policy is really hard.


The economics of cheap drone delivery


Tyler Cowen

Let’s say 30-minute drone delivery to your home were legal, well-run, and, for purposes of argument, free or done at very low cost. You would buy smaller size packages and keep smaller libraries at home and in your office. Bookshelf space would be freed up, you would cook more with freshly ground spices, the physical world would stand a better chance of competing with the rapid-delivery virtual world, and Amazon Kindles would decline in value. Given that the storage costs for goods would fall (more storage by specialists, accompanied by later delivery), expected inflation would more likely be converted into price hikes today. The liquidity premium of money (NB: not currency) would rise and the liquidity premium of goods would fall. Some drug markets would be taken off the streets and the importance of gang “turf” would fall.

Addendum: What do we know about network economies in drone delivery systems? FedEx and UPS and USPS, taken together, dominate the market for physical delivery of parcels to homes. How much room would there be in the market for “lone drone” operators?

 Amazon is developing Amazon PrimeAir .

Brink Lindsey: Why Growth Is Getting Harder

 I just read Brink Lindsey’s new policy analysis Why Growth Is Getting Harder. Bearing in mind Seekerblog’s cautionary tagline from Niels Bohr, Brink’s outlook for growth deserves careful reading and reflection. From the executive summary:

Consider the four constituent elements of economic growth tracked by conventional growth accounting: (1) growth in labor participation, or annual hours worked per capita; (2) growth in labor quality, or the skill level of the workforce; (3) growth in capital deepening, or the amount of physical capital invested per worker; and (4) growth in so-called total factor productivity, or output per unit of quality-adjusted labor and capital. Over the course of the 20th century, these various components fluctuated in their contributions to overall growth. The fluctuations, however, tended to offset each other, so that weakness in one element was compensated for by strength in another. In the 21st century, this pattern of offsetting fluctuations has come to a halt as all growth components have fallen off simultaneously.

The simultaneous weakening of all the components of economic growth does not mean that slow growth is inevitable from here on out. The trends for one or more of them could reverse direction tomorrow. Nevertheless, it is difficult to resist the conclusion that the conditions for growth are less favorable than they used to be. In other words, growth is getting harder.

On October 29 Tyler Cowen, author of the excellent The Great Stagnation, will join Brink for a Cato Forum, on the subject of this paper. The forum will be available live and later in the archives as audio and video.

Is Slow Growth the New Normal?

Featuring Brink Lindsey, Vice President for Research, Cato Institute; Tyler Cowen, Professor, George Mason University; and Martin Baily, Senior Fellow, Brookings Institution; moderated by Annie Lowrey, Reporter, New York Times.

12:00pm Hayek Auditorium

More from Brink Lindsey The Boy Who Cried Wolf Was Eventually Right

“We are reaching end times for Western affluence,” warns economist Stephen King (insert obligatory horror joke here) in yesterday’s New York Times. King, who has authored a book entitled When the Money Runs Out: The End of Western Affluence, joins the ranks of economic Cassandras like Tyler Cowen and Robert Gordon, both of whom have made waves with pessimistic takes on the U.S. economy’s prospects. Like Cowen and Gordon, King couches his claims in overstatements that make it easier for skeptical readers to dismiss his arguments. Peel away the hype, though, and these growth pessmists are still fundamentally correct. The wolf really is at the door this time. In other words, the growth outlook really is darkening.

Krugman and I were both wrong about the Fed and interest rates

Tyler Cowen:

In 2011 Krugman wrote (and here)

Like Bernanke, I don’t believe that the flow of Fed purchases has been an important factor holding bond rates down, and hence don’t believe that they will jump when the purchases end.

I don’t think I ever wrote this view up, but I was of the same opinion nonetheless.  It no longer seems this is true.  We’ve had a significant run-up in rates from mere talk about slowing down Fed purchases.

So which other views about the current macroeconomy will we need to revise?  That’s what I’ve been thinking about for most of today.  The major possibilities are not comforting.  I can’t be talked into them by a day or two of market data, but we do need to look more seriously at:

1. The low rates really have been an artifact of Fed policy, at least to a much higher degree than many of us had thought.

2. Emerging markets tanked on the Fed communication, and so we have indeed been exporting bubbles through a ‘reach for yield’ mechanism.

Yikes, and those are not mutually exclusive.  I still don’t see either of these as theoretically strong, for reasons outlined by Krugman and for further reasons outlined by me here, but of course theory has its limits.  In my post from two weeks ago I will raise my p = 0.05 to p = 0.15, at least.

One also might try to argue #3, namely:

3. Interest rates still haven’t moved ‘a lot.’  Obviously there is no fact of the matter as to what is ‘a lot,’ but I admit to being surprised and Krugman also now seems to have different views, so I don’t think we can throw out the new data as irrelevant.

All of this remains in great flux.

Ryan Avent: The negative rates we need

I like this Free Exchange/Beckworth formulation of NGDPLT policy:

The negative rates we need David Beckworth responds to Mr Garcia with an idea to operationalise the fiscalist-monetarist synthesis:

First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.

This two-tier approach to NGDP level targeting should create a foolproof way to avoid liquidity traps. It should also reduce asset boom-bust cycles since NGDP targets avoid destablizing responses to supply shocks that often fuel swings in asset prices. This approach is consistent with Milton Friedman’s vision of monetary policy, would impose a monetary policy rule, and provide a solid long-run nominal anchor. Finally, per Cardiff Garcia’s request it would satisfy both fiscalists and monetarists. What is there not to like about it?

OPEC and Shale Oil

Megan McArdle has on a single page most of what you need to know about cartel economics. Note: the explosion of shale oil and gas is not for purely technical reasons.

(…snip…) Here's the thing about cartels: without legal enforcement, they pretty much never work. The incentive to cheat, and take extra profits by producing a little more than your quota, is too high . . . so pretty soon everyone is cheating, and your cartel doesn't really exist any more.

OPEC has managed to flagrantly violate this general economic truism for a few decades now. Saudi Arabia is one of the main reasons that it's been able to hold together for so long, even after the price crash of the mid 1980s. Until the Chinese economic boom drove global oil demand right up against the limits of the industry's pumping capacity, causing prices to spike, Saudi Arabia's excess capacity kept prices roughly stable, in the neighborhood of $25-$35 a barrel. Which, probably not coincidentally, is well under the break-even price for shale oil projects.

(…snip…) Better for the cartel for prices to fall to the point where current fracking projects are just barely economic.

But this will not be better for Venezuela, et al. Venezuela is experiencing ongoing shortages of basic goods like toilet paper because of its economic mismanagement. Algeria reportedly needs an oil price of $121 a barrel to cover planned spending–and has already experienced riots over food and housing. Iran is experiencing runaway inflation thanks to sanctions; falling oil prices will only make this worse. That's why they so desperately want the cartel to keep prices over $100 a barrel.

For them, however, the strength of the cartel is also its weakness. In some sense Saudi Arabia is the cartel because they're the ones who can afford–and will stick to–production cuts. Venezuela can make all the demands they want. But unless they can afford to cut their production, they will ultimately have to accept whatever the gulf states decide.


Pay Attention to Sweden!

Rioting in Sweden is the sort of phrase that sounds as if it should be oxymoronic, like ‘Evil in Candyland’ or ‘Violence among Episcopalians’.  And indeed, the rioting seems rather tame by American or British standards–cars set ablaze, stones hurled at first responders.  In the New York of my childhood, not so far from where I grew up, there were neighborhoods that used to call this sort of thing ‘Saturday night’.  


It looks to me as if the great task of the next few decades will be to find ways to employ all the people on the margins productively, and with dignity.  But this is not, mostly, the question that most public policy debates are engaged in addressing.  That question is hard, and no one has a good answer, so instead we debate technical questions about stimulus multipliers and minimum wages, and have the occasional knock down, drag out fight about who has a moral right to how much cash.  There’s nothing wrong with those debates, and I myself have been a spirited participant.  But the harder questions have much more important answers.

Today’s insight from Megan McArdle. You’ll be rewarded for reading the whole essay.

Why are SMR (Small Modular Reactors) so important?

Just a quick note on the captioned topic. I am completely confident that SMR's are the future, though the range of power production will not always be limited to “small”, and the nuclear design will certainly not be limited to today's PWR (pressurized-water-reactor) technology. I wrote this note today in reply to the following comment:

It would not solve the waste problem which the IFR and LFTR probably would solve.

There isn't a “waste problem” because there is no technical issue with unburnt fuel, there is a political problem. If uranium wasn't so cheap the economics would have driven greater reprocessing.

It's important not to confuse the IFR or LFTR contributions with the concept of “mass manufacturing”. Remove the “S” and you have “MR” or Manufactured Reactor which is what is significant.

It isn't SMR-PWR vs. IFR/LFTR, it is volume manufacturing and the safety, quality and cost control that goes with the process-control that is important. When affordable, reliable power becomes a hot political issue – then I think that both fast reactors and thorium reactors will have their opportunities to compete. And both will be manufactured in quantity, where safety will be inherent in both the engineering and the process, not in ridiculously costly inspections.

So when you think of SMR don't think narrowly of current technology – which is constrained by what can be shoved through sclerotic regulators like NRC. Think instead a range of sizes of fast, high-temperature or thermal reactors.

It's also important to keep in mind that what the OECD countries do does not really matter that much w/r/t global warming. It is what the fast-developing countries like China, Brazil, Indonesia, Pakistan, or Uganda do. Those countries need cheap, reliable electricity that they can deploy without first creating a safety/technical culture and the associated infrastructure. One or two gigawatt mega-reactors are not appropriate and will not be adopted in those markets. At the right price 25 to 250 MW reactors that can be buried and refueled in 10 or 30 years – these just might be adopted by countries that don't give a damn about global warming. Let us hope…

We can also hope for a new politics where Bill Gates would have been able to build Terrapower in the USA instead of being forced to go to China. Frankly I think that will not happen – England's reforms would not have happened without the New World to generate the innovation. We don't know where the new models for US/EU will come from or what they will be like. But they might originate in Chile, Shanghai or Estonia.


The bitcoin demand crisis?


As I write there are about 11 million bitcoins minted. There will be about 21 million bit coins when the increasingly power-hungry crypto algorithm stops minting fresh coins. Is it money? What is driving the enormous surge in trading prices? At the moment the total market cap is less than Facebook paid for Instagram (which was a company of nine people at the time?)

For some bitcoin perspective, read Zachary M. Seward’s  Quartz series – where Zachary attempts to unravel the future of bitcoin. This is a good place to get some perspective on the crypto-currency: Example: 

(…) Last time I wrote about bitcoin’s surge, I cast doubt on the popular theory that it’s due to the crisis in Cyprus and asked for better ideas. (Here’s my email address.) The best explanations I received were the simplest: bitcoin is going through a “demand crisis,” as Quartz reader Rees Sloan put it. That’s as obvious as it sounds—increasing demand for the currency is pushing its value higher—but framing it as a crisis emphasizes some other truths: As bitcoin’s value rises, so does interest in it, which drives the price up even further, leading people who own bitcoins to expect even more gain, making them reluctant to sell, reducing the available supply of bitcoins, driving the price still higher, leading to more interest, which…


That’s great publicity if you’re a bitcoin speculator, riding this surge to $100 before dumping the currency on a very eager market. It’s less encouraging if you believe in the idea of bitcoin as a truly alternative currency, unencumbered by sovereign governments, a refuge from the turbulence of monetary unions and fiat money. If that’s the bet you’re making on bitcoin, brace yourself: Just today, the value of a single bitcoin swung between $75.00 and $95.70.

Market forces tend to ruin good ideas.

 Full disclosure – we have no position in bitcoin And AFAIK there is no way to short bitcoin. If there was…