The Business of Surge Pricing
The millennial malaise: a feeling of despair experienced by 20-somethings when faced with Uber’s surge pricing. We’ve all been standing under pouring rain, internally debating whether we can justify spending 3x the standard fair. In 2013, after a weekend of rough weather in New York, the app’s surge pricing stayed at a steady 7x to 8x, making a 20-dollar cab ride upwards of 100 dollars. The company’s CEO Travis Kalanick defended himself against the uproar by stating the simple law of supply and demand: if the demand increases, the price must also increase to keep the drivers working through tough conditions and make sure those who really want a ride get one. However, how reasonable is it to ask clients to consider such astronomical prices?
Unsurprisingly, the company’s implementation of surge pricing has stirred controversy from its users since its creation, and more recently, the New York City Council. For the past 2 years, the New York City Council has been fighting with Uber to limit its surge pricing. Ultimately, the council conceded and Uber was permitted to keep surge pricing, on the condition that fair estimates had to be capped at 20% over the highest boundary, or else a $500 fine would be imposed. This compromise was most beneficial to the app company, whose business model is rooted in this discriminatory pricing. Uber charges people the maximum they are willing to pay through surge pricing, unlike a traditional cab company who cannot alter their prices based on environmental conditions. This is personalized pricing; Uber is requesting a different amount for each user based on their location and the time at which they requested a car. When Uber first gained popularity, it created a sort of monopoly as it was the only on-demand car service. However, with users turning to companies like Lyft (that cap surge pricing at 200%) when Uber surge pricing becomes too high, the company might have to reconsider its policy.
This policy is rooted in Uber’s algorithm, which according to ABCNews, has been well understood by a group of computer scientists from Northeastern University. The scientists concluded that the policy has “a strong, negative impact on passenger demand, and a weak, positive impact on car supply. However, it is possible that different effects may occur at the macro-scale (i.e., a whole city)." Uber responded that the findings were untrue, and used a personal case study to their defense, stating, “on New Year’s Eve, without surge, ride requests skyrocketed and only 25% of these requests were completed. ETAs also increased sharply. Without surge pricing, rider and driver behavior did not adapt to the increased interest in getting a ride.”
The outcomes from this incident supports Uber’s simple supply and demand model. While the company can still make strides to reach a similar model to Lyft that imposes a maximum fair, Uber can nonetheless be credited with popularizing surge pricing. This business model has inspired other businesses; most recently, amusement parks. Disney Parks is now adopting “seasonal” pricing, and has stated “if guests plan their visit for September, they’ll have a variety of options, including many days in the value period, which will give them the opportunity to pay less for a 1-Day ticket. If they plan to visit during a peak period, like the winter holidays, they will pay more.”
Disney’s decision raises an interesting question about a broader trend in price discrimination. While increasing fairs helps to bring down crowds on “peak” days, it renders certain services purely price-based. Those who are willing to pay more will by default be favored to those who can only pay the standard fair. This is all the more relevant to college students, many of whom will be at a disadvantage in the growing world of surge pricing.