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.