Timothy B. Lee offers several defenses of surge pricing by Uber and Lyft, including this.
It might seem like an obvious point, but it’s often overlooked by people who complain about surge pricing. Surge pricing gives drivers an incentive to spend more time on the road than they otherwise would. It encourages them to re-arrange their schedules to make sure they’re available on nights of peak demand. And it entices drivers who might otherwise like to go out partying themselves on New Year’s Eve to hit the road instead.
I haven’t been able to find any hard data on how much higher prices increase the number of drivers on the road — a measure economists call the elasticity of supply. But there’s reason to believe that big price increases will be more powerful during nights of predictably high demand — like Halloween or New Year’s Eve — than at other times.
If demand spikes unexpectedly, there might be a limit to the number of people who can immediately jump in their cars and help out. But everyone knows New Year’s Eve is the biggest night of the year for taxi service. Lyft has been sending me emails all week reminding me that I could make a lot of extra money if I drive tonight. So people who need some extra money have plenty of time to make the necessary arrangements.
So, to his credit, he admits that there is no data supporting surge pricing as a means of enticing ride share drivers onto the road but suggests that surge pricing incentivizes drivers to come out. The point he elides is that it is just as likely that drivers will come out on nights like New Year’s Eve whether there is surge pricing or not. The sheer volume of ride requests guarantees more business than they can adequately serve, and consequently a profitable evening. It is not surge pricing which allows just about every taxi company in major metropolitan areas to lease all of their cabs with ease on nights such as these.
To an extent the success of Uber has been driven by pricing its service substantially below the local taxi market prices. Its ability to do so derive from a substantial venture capital funded war chest as well as evasion of costly local regulations (the appropriateness of that evasion is a subject for another post). Uber’s price competition does saddle its drivers with a structure which compensates them at a level which allows for simply minimal profitability. Surge pricing is the variable which boosts drivers’ take to acceptable levels. Without it Uber might find it difficult to continue to attract and retain drivers.
To put it another way, surge pricing has nothing to do with enticing drivers to offer their services during busy periods. It is an excuse which Uber uses to overcharge for rides in order to bring the total compensation of drivers to a level whichwillensuretheir continued participation with the company. It’s not necessary on New Year’s Eve but it can be spun as such in order to achieve a different objective.
The problem Uber faces is consumer resistance to surge pricing. Not that riders will refuse to use their service; rather they are becoming educated and will simply arbitrageamong transportation providers for the lowest cost rather than simply punching up a ride on Uber. As taxi companies respond to Uber’s challenges and offer their own apps the ability to choose between price and convenience becomes much easier and Uber’s ability to offer its drivers the extra compensation from surge pricing is diminished. Among other challenges facing Uber will be its ability to replace the lost surge pricing income with higher fares and the concomitant effectthatwill have on their attractiveness to taxi service.
Uber isn’t going away but surge pricing is, and that represents a significant challenge to the company’s business model.