Archives: 12/2014

The Economics of Uber’s Surge Pricing

The recent tragic siege in Sydney has, perhaps unexpectedly, put Uber’s surge pricing system back in the headlines. Some considered the fact that Uber would allow for surge pricing to take effect amid a hostage crisis to be outrageous and insensitive. Yet, surge pricing ensures that Uber drivers will be on the road at times of peak demand and that the passengers who want an Uber ride the most will get one. Uber’s surge pricing system might seem strange and at times extortionate, but it merely puts on display basic economic forces that are at play all the time which most of us never question, and it should not be abandoned at times of high demand or in emergencies.

It is important to remember that surge pricing automatically kicks in thanks to Uber’s price algorithm. There was no Uber employee who decided to impose surge pricing amid a hostage crisis. Uber claimed that it kept surge pricing in place in order to get drivers on the road amid the crisis. Uber has no control over when drivers decide to log into its app, it can only provide financial incentives. Without surge pricing in effect there may well have been fewer drivers willing to get passengers out of Sydney’s Central Business District (CBD), the site of the siege. Uber responded to criticism of its surge pricing by making trips from the CBD free while keeping the surge rate high. Uber also claimed that it was refunding fares for passengers who left the CBD and were charged while surge pricing was in effect. Despite these steps, it should not be forgotten that the criticism Uber initially faced for surge pricing in Sydney was misplaced. Those who did not want to pay Uber’s elevated fares had other means of public transportation by which to leave the CBD.

Uber surge pricing is ordinary supply and demand economics at work. Given that Uber drivers drive at their own convenience it should not be a surprise that they are more likely to get on the road and meet demand at busy times if they can expect higher-than-average earnings. Many of Uber’s rideshare drivers use Uber on a part-time basis. Unsurprisingly, drivers who work more than one job or who have worked a full week may be reluctant to drive on weekends or late into the evening. Uber wants to keep the number of “zeroes” (a term used to describe Uber users who open the app and see no available cars) to a minimum. But, when Uber brought surge prices down to 3x from 6x in east coast cities on New Years Eve in 2012 zeroes were “popping everywhere.”

What is great about a pricing system like Uber’s surge pricing is that it allows users who want an Uber ride the most to have it. Prices are a great way of communicating customer preferences. When you buy a coffee for $3.00, you are telling the market that you value the coffee more than you value $3.00. Likewise, someone who is willing to spend $100 getting home in the early hours of a busy Saturday is signaling that he values the ride home more than he values $100. Many people would not be willing to pay the $100, opting to wait for the surge to end or to find alternative transport home.

At this point some readers might be thinking: “Well yes, Matthew, but many Uber passengers are perhaps not in their most rational state of mind at 2am on a Saturday.” I don’t dispute that. Perhaps one of the best recent examples of someone regretting an Uber ride during surge pricing is the 26-year old Baltimore-based woman who spent $362.57 on an Uber ride home in the early hours of November 1 (her birthday) after “a few drinks.” While some might think this fare is extortionate, it is worth remembering that Uber requires that users first accept that surge pricing is in effect and then enter in the amount of the surge before they request a ride. Uber’s app also allows users to estimate a fare before requesting a ride. Uber does not have a responsibility to make sure that you make good decisions after “a few drinks” in the early hours of a busy Saturday. Once you have accepted that surge pricing is in effect and entered the amount of the surge in the app you have no one to blame but yourself when you wake up with less money in your checking account than you were expecting.

Of course, an argument could be made that surge pricing is reasonable during times of predictable high demand (such as New Year’s and rainy Saturday evenings) but not during a crisis like the one that recently occurred in Sydney. In July, Uber announced that in U.S. cities surge pricing would be capped during disasters. In the wake of the news from Sydney Uber may implement a similar policy in Australia.

Those who are complaining about Uber’s surge pricing system ought to consider the following: given that Uber drivers are setting their own schedules and respond predictably to financial incentives it might not be that strange that having an Uber car driven to your location, which is close to the site of a terrorist attack, can cost more than an ordinary Uber ride.

Do Businesses Have Rights?

The Washington Post reports:

As far as sales manager Brian Ward knows, Rep. Andy Harris has never shopped at Capitol Hill Bikes. But if the Maryland Republican congressman wanted to, he’d find a black and white picture of himself taped on the door with a message in bold type: NOT WELCOME.

To many in the District, Harris is a public enemy — the force behind language added to the massive federal government spending bill intended to block D.C. from legalizing marijuana despite local voters overwhelmingly approving it on the November ballot.

The move so infuriated District residents that someone has started a “Blacklist Andy Harris” tumblr asking local businesses not to serve Harris:

“My fellow Washingtonians, Rep. Andy Harris doesn’t give a d— about District residents or our rights, so let’s blacklist him! We can generate and distribute signs/stickers/posters with his face, words like “Persona non Grata” (or something similar), and ask local businesses to display them.”

I support these District of Columbia businesses’ right to refuse service to Representative Harris. Now I know there are people who would say to these small businesses, “Open a business to serve the public? You have an obligation to serve everyone.” But I say that Capitol Hill Bikes should be free to refuse service to Andy Harris, and Republicans and anti-drug activists should be free to refuse to patronize Capitol Hill Bikes. Every contract is an agreement voluntarily entered into on both sides, and no one should be forced to enter into contracts. Thus I support the right of D.C. businesses to refuse to serve those would-be customers who offend their conscience, just as I support the right (though not the rightness) of bakers, photographers, and innkeepers not to participate in gay weddings.

Are the Baltic Republics Serious about Defense?

News stories in the West contend that Russia’s increasingly aggressive behavior is causing the Baltic states and other NATO members in Eastern Europe to become far more serious about national defense.  There is no doubt that tensions in the region are on the rise, including a surge of  incidents involving NATO intercepts of Russian military aircraft operating over the Baltic Sea.  The new congressional approval of military aid to Ukraine may well increase the already alarming level of animosity between NATO and Russia. 

But the notion that the Baltic republics have embarked on serious programs to boost their defense capabilities in light of Moscow’s menacing behavior is vastly overstated.  The military spending of those three countries has merely moved from minuscule to meager.  Although all NATO members pledged after the Alliance’s summit meeting in 2006 to spend a minimum of two percent of gross domestic product (GDP) on defense, few members have actually done so.  Indeed, eight years later, only the United States, Britain, Greece, and Estonia among the 28 member states fulfill that commitment

And Estonia barely met that standard.

All three Baltic governments are going to great lengths to highlight their alleged seriousness about defense, but the actual data fail to support the propaganda.  Amid much fanfare, Estonia plans to boost its military spending from 2.0 percent of GDP to…. wait for it, 2.05 percent!  Lithuania intends to raise its budget next year from 0.89 percent to 1.01 percent.  And Latvian leaders solemnly pledge that their country will spend no less than 1 percent—up from the current 0.91 percent.

The Federal Spending Juggernaut

Over the weekend, the Senate approved the $1.1 trillion Cromnibus spending package, which funds parts of the government through September 2015.

The ink isn’t even dry on this spending bill, and already big spenders in Congress are gearing up to increase next year’s spending above agreed upon limits. The Wall Street Journal describes the situation:

After four years of a divided Congress, Republicans will take full control of both chambers in January with hopes of passing individual spending bills under an orderly process rarely seen in recent years. But complicating their task will be the return of the across-the-board spending cuts known as the “sequester” birthed out of the 2011 debt-ceiling deal, which set caps on spending for the next decade.

A two-year bipartisan budget deal brokered by Senate Budget Committee Chairman Patty Murray (D., Wash.) and House Budget Committee Chairman Paul Ryan (R., Wis.) eased those cuts for fiscal years 2014 and 2015. But the $1.1 trillion bill passed over the weekend, which will fund most of the government through September 2015, marks the final stretch of that agreement.

In fiscal 2016 the cuts return in full force. Lawmakers broadly agree the reductions inflict blunt pain on the federal budget. But Democrats and Republicans are at odds about how to mitigate them in a dispute likely to grow in intensity during the coming months.

Time to Close Thailand’s Camps for Burmese Refugees?

MAE LA REFUGEE CAMP, THAILAND—Trees give way to primitive wooden homes in the rolling hills approaching Mae La refugee camp on Thailand’s border with Burma.  The largest camp in Thailand, Mae La, holds 50,000 refugees. 

Three years ago Burma’s ruling generals yielded authority to a nominally civilian leadership and initiated a series of ceasefires with various ethnic groups.  The resulting peace is real but imperfect. 

Today there are as many as 150,000 refugees in ten Thai camps.  Overcrowded Mae La was established three decades ago when many assumed that their stay would be short.

Residents are barred from even leaving the camps without official permission.  Education is difficult.  People’s lives, futures, and dreams are all confined by fences and armed guards.

Perhaps worse, sustenance is provided and work prohibited.  This has discouraged independence, enterprise, and entrepreneurship. 

With the changes in Burma serious discussions about closing the camps have begun.  In July Thailand’s military junta declared its objective to repatriate all refugees by 2015.

Mae La refugees I talked to wanted to return, but worried about security.  NGOs observe that a national political settlement has yet to be implemented.   

Suing Gun Businesses Over Sandy Hook

There’s a new legal attack under way against firearms, as the press reports

Ten families touched by the Newtown massacre filed a wrongful death lawsuit Monday against companies that made, distributed and sold the Bushmaster AR-15 rifle that Adam Lanza used to kill 20 children and six staffers at Sandy Hook Elementary two years ago. The suit argues that the gun is a military assault weapon that never should have been on the general market.

Jacob Sullum at Reason has more details, especially on the arbitrary nature of the epithet “assault weapons,” often uncritically repeated in the press. 

In 2005 Congress enacted the Protection of Lawful Commerce in Arms Act (PLCAA) specifically to put an end to product liability suits over guns that had been made and sold in accordance with law. The courts have generally enforced it as written – even the Ninth Circuit’s famously liberal Judge Stephen Reinhardt agreed that it was constitutional – which has mostly, if not entirely, led to the dismissal of such lawsuits. The new Connecticut suit seeks to reopen the question by stretching beyond recognition a narrow exception in the law allowing businesses to be sued over “negligent entrustment.” (The firearm used by the Newtown killer had been lawfully sold long previously to his mother.)

Last year I wrote a piece entitled “Six Myths About the Law That Bans Gun Lawsuits” for the Power Line blog, pointing out that the PLCAA for the most part codified the common law treatment of gun liability as it had stood for centuries, thus advancing both a constitutional liberty and the legitimate freedom of interstate commerce against efforts to obtain a radical change in doctrine. I also noted that PLCAA probably make little ultimate difference in the Sandy Hook case because claims against gun makers and distributors over that massacre would probably not have succeeded anyway. And I rebutted a notion that came to be promoted years later, that the law was somehow not meant to reach privately filed liability suits:

A Washington Post report in January [2013] claimed the law poses “unexpected hurdles” to victims of recent mass shootings, whose lawyers are supposedly “surprised” at its pre-emptive effect. At the time Congress passed the law, the Post concedes, big-city mayors had filed a wave of lawsuits on novel theories demanding (for example) that courts begin treating gun sales as a “public nuisance” . “But over the past eight years, the legal shield has increasingly been used to block a different stripe of legal action.” The Post’s implication that Congress intended to restrict only municipal suits, and not tort suits on behalf of individuals, is false. Lawmakers debated the question and chose to include both. One reason is that anti-gun strategists were actively employing individual as well as municipal suits in their nearly successful effort to bury gun makers under the costs of legal defense. An editorial complaining that the law banned both kinds of suits appeared on June 2, 2005 in (yes) the Washington Post.

Let’s not forget that the relatively shallow pockets of gun-related businesses was part and parcel of the abusive strategy of the politicians and lawyers promoting the suits back then: 

because gunmakers were too thinly capitalized to withstand the costs of years of legal defense, it was thought they’d fold their hands and yield to “gun control through litigation” (explicitly couched as an end run against a then-Republican Congress resistant to gun control proposals). …the suits eventually reached judges and were generally thrown out, but not before imposing huge and uncompensated costs on many small companies that had violated no laws. Some were bankrupted.

We may hope that the courts are alive to the ongoing importance of PLCAA, and willing, as appropriate, to apply the tool of sanctions against legal strategists and campaigners who would seek to circumvent its provisions in the name of ideological grandstanding, profit, or revenge.

NOBODY Expects the Spanish Press Contrition!

Back in October, Spain’s parliament passed a horribly ill-advised law at the behest of the Spanish news publishing lobby, the AEDE. Struggling to adapt to the information age in one of Europe’s more troubled economies, the AEDE thought it had hit on a brilliant new revenue source: They got a provision inserted in a new intellectual property law that, starting in January, will force news aggregation sites to pay newspapers for the privilege of linking to their stories.

This never made much sense: News aggregators are a massive source of traffic (and therefore ad revenue) for news sites.  In effect, the law seeks to make it more difficult and costly for anyone to give those sites free advertising.  Indeed, it’s hard to see the point of posting stories online unless you expect people to link to them, and it’s simple enough to automatically prevent search engines from indexing your site’s content if, for some obscure reason, you don’t want people to have an easy means of discovering your content.  But never mind the logic; the law seemed like a foolproof way for ailing news companies to milk a few euros from big tech corporations flush with cash. What could go wrong?

You know how the story ends, right?  Everyone but the newspapers themselves seems to have seen it coming, since something similar had just played out in Germany: Google News, the largest of the aggregators, announced last week that they would be shutting down operations in Spain. Since the company didn’t even show ads on its news site, keeping it open under the new regulations would be an unsustainable, money-losing proposition.

The hilarious coda to the story: The AEDE, which previously complained that news aggregators were “stealing” their work by publishing headlines and tiny snippets of stories, is now begging Spanish regulators to stop Google News from closing. The site’s shuttering, the group complained without irony, “would undoubtedly have a negative impact on citizens and Spanish businesses.” Give them points for chutzpah if nothing else: They’re not even waiting for the blood to dry on the hatchet before bemoaning the loss of their golden eggs.