Is it Fare?: In Defence of Uber’s Surge Pricing
Uber, operating in over 70 countries with 93 million monthly users, faces criticism for its surge pricing during peak hours, but this pricing strategy, deemed surge pricing rather than price gouging, serves as a dynamic market approach appreciated by economists. Despite customer complaints, surge pricing efficiently allocates rides to those in urgent need, benefits drivers by offering incentives for challenging shifts, and serves as a valuable model for understanding supply and demand dynamics, contributing to the ongoing debate on anti-gouging laws and market efficiency.
After over a decade of operation, Uber has solidified its status as the leading ride-share company among commuters. The tech company has quickly driven itself to success, now available in over 70 countries, providing its service to 93 million active monthly users. Its product is now a popular method of transportation, but Uber often faces flak for jacking up prices during peak hours. Bad weather, holidays, and weekends are all culpable for these large spikes in prices. Interestingly, what their users dislike the most about the company’s service, is what has kept it on the road for so long.
Uber’s price mechanism has certainly changed the game for the taxi industry. Unlike traditional taxis, Uber operates with less regulatory oversight from municipal and provincial governments. Taxis must obtain an operating permit, also known as a taxi medallion, from the municipal taxi bureau if they want to pick up passengers without a predetermined meeting point. Uber sidesteps the need to make this expensive purchase by having clients arrange specific locations and times to meet their ride. Consequently, Uber faces fewer constraints than taxis, which gives it an edge over cab companies. The company’s limited regulation by transportation authorities allows it to impose surcharges during periods of high demand, a strategic move that has propelled its development.
Despite its success, Uber’s free-market approach often draws criticism from many customers who believe that Uber’s “price gouging” is unfair. Understandably, no one is happy to pay $20 for a trip that should only cost $10.
However, Uber’s pricing strategy should instead be celebrated by its users. First, a distinction should be made between surge pricing and price gouging. What the company does is considered surge pricing because Uber is not a product that anyone needs to purchase. Indeed, there are plenty of different forms of public transportation that can just as well get you from point A to B. Additionally, other shared vehicle companies like Lime, Bird, or BIXI provide cities with bikes and electric scooters that commuters can also use for flexible transportation. Alternatively, price gouging is when businesses profit off of a bad situation by increasing prices of essential items that do not have substitutes. For example, doubling the cost of generators during a long power outage. In fact, Uber’s surge pricing benefits both the company and the client. High prices ensure that if you absolutely need a ride, you’re likely to get it. Certainly, surge pricing is appreciated in a hurry by discouraging hoarding behavior from people who can use alternatives. The willingness to pay for the surcharge acts as an indicator of their urgency for fast transportation. As such, Uber reduces operational inefficiencies because the price mechanism that is used ensures that rides are allocated to the consumers who want them the most. If Uber maintained low rates during peak hours, customers would wait much longer for a ride. Users must weigh the trade-off between wait times and the additional cost. Essentially, by paying the surcharge, you are paying for the convenience of a quick trip.
More importantly, this dynamic pricing is also a plus for the drivers by redistributing wealth to their pockets. Driving in bad weather or crowded roads is never an appealing endeavor. It makes sense that your employer would give you an extra incentive to take the shifts that no one else is inclined to do. Increased prices during busy moments motivate Uber drivers to continue to provide good service in times of need. Meanwhile, taxi drivers must face these adverse conditions with the same base pay that they would receive during periods of average activity. Essentially, high prices are like a bonus for the drivers who agree to work in otherwise unsavory conditions.
As it turns out, economists are also Uber fans. According to Steven Levitt, author of Freakonomics, Uber’s dynamic prices are how economists want markets to act. When there’s increased demand for rides and few drivers, prices go up. When supply increases, prices drop. In other words, Uber brings to life the very theoretical supply and demand model. Understanding these interactions between supply and demand further justifies the need for surge pricing. Moreover, while it is crucial to differentiate surge pricing from price gouging, Uber can still serve as a valuable model that helps identify effective price gouging laws. The debate over anti-gouging laws, namely about uncontrollable situations like pandemics, forces policymakers to create an ethical balance between market efficiency and consumer protection. Politicians usually lean towards anti-gouging laws since they garner more support from constituents, but is this always the best option? A proposed solution has been a policy where anti-gouging laws apply in times of disaster, and governments provide subsidies to producers to continue to incentivize supply. A possible middle ground in this nuanced discussion.
At the end of the day, Uber offers a luxury good, and its pricing does not have the same moral gravity as price gouging during a hurricane. While it might seem like an inconvenience, Uber’s surcharge is in fact a sheep in wolf’s clothing.
Written by Clara Goddard