Surge Pricing

(Thanks to Cafe Hayek for article linked to in this post and the previous post)

Here’s Ryan Bourne defending Uber’s surge pricing.

Surge pricing is a tough concept for people to understand. Most people view it as exploitative and as price gouging.

It’s easy to understand why. To them it seems like, on the margin, it’s the poor who get priced out of the market.

For those who understand the bigger picture, they can see that the benefit of surge pricing is to bring more supply into the market to meet the higher demand. The key trade-off is higher prices reduce wait times for the service or product.

Keep the price low, and the rationing is done mostly by how long people are willing to wait. Increase the price, more supply comes into the market to reduce wait times and also, this should bring prices down again.

One question that should be asked of those who complain of the surge prices on Twitter, would they rather have low prices and had to wait 1-2 hours or maybe even never have got the ride or would they rather have paid the higher price?

Another piece information that might be helpful is what the surge pricing looks like. Do the prices surge, but then come back down as supply increases? Standard Econ 101 (many 102) supply and demand curves suggest that should happen, though the new price level will still be higher before the demand surge.

But, it would be nice to know. It might help the price gouging crowd to know that prices jumped 30% initially and then dropped to a 10% over normal prices as more drivers came online.

As for Uber, I have a suggestion. I wonder if they could use a voluntary surge pricing model.

How would that work? Like the fast pass lines at amusement parks. If you want to pay more to be served quickly, you can. If you’d rather pay the regular price and wait, you can do that, too.

That allows people to make the cost-benefit trade-off on their own, instead of Uber forcing it down their throats.



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