4 ms·

Uber’s Surcharges Demonstrate The Harsh Reality Of Dynamic Pricing

29 points by llambda 15y ago

patio11 15y ago
Uber dynamic pricing is positive for customers on New Year's Eve, in that it ensures that if you are willing to pay money a cab is available for your use. The market, it's magic.
- ABrandt 15y ago
  I'm as big of a proponent of the magic that is supply and demand as anyone, but uber's pricing was not exactly transparent. Last night was the first time that I used the service. My first ride from my hotel in Chicago to my party destination at 9pm was $15, awesome. Not only was I thrilled by the quality of service, but I saw the message that fees would be higher that night and was expecting a higher price tag. Fast forward four hours later and I was ready to head back to the hotel. Same route, except this time the price was $54. Ouch. The thing about market forces is that the buyer needs to be aware of the price in order to make a rational decision that affects demand and alleviates the strain on existing supply. Uber's app indicated I would be informed of the additional charge prior to my ride, but that certainly never happened. In that regard, I feel slighted and my feelings toward the company have been damaged as a result.
  - buro9 15y ago
    But this has always happened on NYE to minicab fares. In London it's almost impossible to get a black cab on NYE. Black cabs have their fares capped by regulation to something like 3x the regular fare. As such, it's not lucrative to work that night for such a small difference when they could be with their families. Minicabs on the other hand are not capped, and are largely unregulated. Many of them do work precisely because they can charge much higher rates, and they do. I once got a minicab on NYE that cost over £170 for a journey that should have cost closer to £30. Caveat emptor. What seems to be the case here isn't the market doing what the market does best (regulate supply and demand and the cost thereof), but the naivety and optimism of the consumer who hopes for cheap prices despite a severe spike in demand and a shortage in the supply able to meet the demand. The last time I needed a cab on NYE, I chose to walk the 11 miles home. I was drunk, I was singing New Order most of the way. I actually really enjoyed the walk and saved myself a lot of money in the process. I've lost my naivety around cab fares on that night.
    - tankenmate 15y ago
      All I can say to Londoners is; if you think this is bad, wait for the Olympics.
adamjernst 15y ago
Knowing the economics behind it, I'm all for dynamic pricing even though it does feel like a ripoff to me personally. I'd be very interested, though, to know how much of the increase (~6x normal according to a screenshot on their site) is passed along to the driver.
- whereareyou 15y ago
  Uber takes the same cut as they normally do.
  - baddox 15y ago
    The same proportional cut, or the same constant cut? I'm unfamiliar with how their revenue sharing with drivers works. But, either way, I'm fine with this practice. The only possible controversy is how well they inform their customers that it will happen, and how clear it is on their app what the price will be. It would be bad for them to have a bunch of customers expect to easily get an Uber on New Year's Eve, then be disappointed by lack of availability or high prices. I wonder why Uber does this? Is it mainly an incentive for their drivers (to get as many on the road during a high-stress time)? Or is it because they would rather have customers see high prices than to see zero availability?
dannyr 15y ago
I don't think the issue is dynamic pricing but the app's UI. If it said "We'll be charging you $50 for this trip" instead of "The rate will be 6.5x than normal", users would not have taken the ride. If the UI was right, the prices wouldn't have increased to more than $50 per mile since demand would have likely decreased when the rate was about $20 per mile.
teyc 15y ago
The general public's problem with dynamic pricing for highly scarce goods and captive market (stuck in the city) is that it makes for extremely bad feelings. The phrase "Price gouging" comes to mind. Even when dynamic pricing is available, as long as people are stuck, they will feel resentment. Another example is when there are hurricanes or floods. Shops could charge "market pricing" for bottled water, but this only generates ill-will. What shops do is to ration the supplies so that all those who need bottled water get some. The problem with cabs is you can't implement rationing. Furthermore, supply is always going to be tight even if all the limousines came out in full force. It is one of those once-a-year spike in demand. The airline industry solves this problem by offering advance bookings. The benefits of advance booking is that it incorporates some kind of price signal so that people can decide whether they wish to travel or not. However, it will take considerable cultural change for people to modify their discretionary going-out based on fares alone.
- shasta 15y ago
  Steeply increasing the cost of water bottles or scarce items during a flood or hurricane lessens stockpiling more effectively than rationing. Furthermore, prohibiting "gouging" eliminates the incentive for shops to keep an oversupply of water in case of a hurricane.
  - teyc 15y ago
    I couldn't find the article any more, but it was talking about shopkeepers' reluctance to hike the price of bottled water in times of emergency because it harms their long term relationship with a customer. There's nothing wrong with what you talk about in a perfect economic setting. I think humans reason beyond short term economics alone, and an act of graciousness during time of need will be reciprocated in the long run.
  - fleitz 15y ago
    Also, increased price after a natural disaster causes the supply side to overcome obstacles such as downed trees, and dangerous hazards such as structurally unsound bridges.
brian_cloutier 15y ago
Are there any companies out there that try to predict these price hikes and recommend the best time for you to do something? As in, "I noticed that you're asking for a cab. If I were you, I wouldn't be in a hurry, ask again in about half an hour and you'll get a much better deal." "I see you're at a bar. You should probably hop into a cab sometime soon, the prices are about to soar." Bonus points if you can use multiple sources at once. "I know that you heard hotels in Houston are going to be expensive next week so you rescheduled your trip for next month, but if you go to these restaurants and use this deal for car rentals, you'll end up saving money overall by going next week." Obviously we're a few years away from those kind of recommendations, but is anybody working on the core idea of predicting when it's best to use a given service?
- beagle3 15y ago
  FareCast used to do that for flights; It's been bought by Miscrosoft and integrated into bing travel somehow (although I can't tell which of the answers you get there are "organic" and which are "farecast").
stevewilhelm 15y ago
I can predict what will happen next New Year Eve. Riders will hedge against Uber's unpredictable price inflation by demanding the ability to lock in a lower price several days or hours in advance. This "feature" is available now, it's called a limousine service.
- ShabbyDoo 15y ago
  Let's take it a step further. Uber could provide a futures market for car service. The same economic incentives which drive cattle producers to lock-in the prices at which they will sell their cattle at the same time as they lock-in their feed prices exist for car service. Thinking about staying at the swanky hotel that's located a few miles from the party? Buy a forward contract on car service at the same time you book the room. The issue I see is that, without standardization of "product", it would be hard to create an active marketplace. To a driver, taking someone away from the city to the suburbs isn't as valuable as a route which leads to another customer's point of departure. This, of course, implies that the drivers would also be participating in the futures market. If they noticed, before considering taking NYE off to be with their families, that they could earn $200/hour, they might reconsider. Furthermore, would customers be willing to lock-in service at a particular time? What if the party is still going strong at your appointed time? You could sell your service slot to someone else, but would you be willing to put your contract up for sale while sipping a martini with your significant other? Is there a market design which provides sufficient certainty and price/demand visibility in a way where transactional costs don't destroy the value proposition? Perhaps the ubiquity of pocket "trading terminals" will usher in a new era of dynamic pricing which will require the design of new market models? Next up, concert tickets.
wmf 15y ago
It also looks like they first "round up" to the $15 minimum, then multiply by the dynamic factor.
shalmanese 15y ago
Demand and supply meet at equilibrium when all players in the market are rational and have perfect information. In Uber's case, their poor UI meant that people did not have perfect information and there was a market mismatch. What should have happened is that many people would have realized that paying $50 to drive a mile was absurd and walked, resulting in a more reasonable 2 - 3x surcharge rather than an insane 6x surcharge.

29 points by llambda 15y ago

Uber dynamic pricing is positive for customers on New Year's Eve, in that it ensures that if you are willing to pay money a cab is available for your use. The market, it's magic.

ABrandt 15y ago
I'm as big of a proponent of the magic that is supply and demand as anyone, but uber's pricing was not exactly transparent. Last night was the first time that I used the service. My first ride from my hotel in Chicago to my party destination at 9pm was $15, awesome. Not only was I thrilled by the quality of service, but I saw the message that fees would be higher that night and was expecting a higher price tag. Fast forward four hours later and I was ready to head back to the hotel. Same route, except this time the price was $54. Ouch. The thing about market forces is that the buyer needs to be aware of the price in order to make a rational decision that affects demand and alleviates the strain on existing supply. Uber's app indicated I would be informed of the additional charge prior to my ride, but that certainly never happened. In that regard, I feel slighted and my feelings toward the company have been damaged as a result.
- buro9 15y ago
  But this has always happened on NYE to minicab fares. In London it's almost impossible to get a black cab on NYE. Black cabs have their fares capped by regulation to something like 3x the regular fare. As such, it's not lucrative to work that night for such a small difference when they could be with their families. Minicabs on the other hand are not capped, and are largely unregulated. Many of them do work precisely because they can charge much higher rates, and they do. I once got a minicab on NYE that cost over £170 for a journey that should have cost closer to £30. Caveat emptor. What seems to be the case here isn't the market doing what the market does best (regulate supply and demand and the cost thereof), but the naivety and optimism of the consumer who hopes for cheap prices despite a severe spike in demand and a shortage in the supply able to meet the demand. The last time I needed a cab on NYE, I chose to walk the 11 miles home. I was drunk, I was singing New Order most of the way. I actually really enjoyed the walk and saved myself a lot of money in the process. I've lost my naivety around cab fares on that night.
  - tankenmate 15y ago
    All I can say to Londoners is; if you think this is bad, wait for the Olympics.

adamjernst 15y ago

Knowing the economics behind it, I'm all for dynamic pricing even though it does feel like a ripoff to me personally. I'd be very interested, though, to know how much of the increase (~6x normal according to a screenshot on their site) is passed along to the driver.

whereareyou 15y ago
Uber takes the same cut as they normally do.
- baddox 15y ago
  The same proportional cut, or the same constant cut? I'm unfamiliar with how their revenue sharing with drivers works. But, either way, I'm fine with this practice. The only possible controversy is how well they inform their customers that it will happen, and how clear it is on their app what the price will be. It would be bad for them to have a bunch of customers expect to easily get an Uber on New Year's Eve, then be disappointed by lack of availability or high prices. I wonder why Uber does this? Is it mainly an incentive for their drivers (to get as many on the road during a high-stress time)? Or is it because they would rather have customers see high prices than to see zero availability?

dannyr 15y ago

I don't think the issue is dynamic pricing but the app's UI. If it said "We'll be charging you $50 for this trip" instead of "The rate will be 6.5x than normal", users would not have taken the ride. If the UI was right, the prices wouldn't have increased to more than $50 per mile since demand would have likely decreased when the rate was about $20 per mile.

teyc 15y ago

The general public's problem with dynamic pricing for highly scarce goods and captive market (stuck in the city) is that it makes for extremely bad feelings. The phrase "Price gouging" comes to mind. Even when dynamic pricing is available, as long as people are stuck, they will feel resentment. Another example is when there are hurricanes or floods. Shops could charge "market pricing" for bottled water, but this only generates ill-will. What shops do is to ration the supplies so that all those who need bottled water get some. The problem with cabs is you can't implement rationing. Furthermore, supply is always going to be tight even if all the limousines came out in full force. It is one of those once-a-year spike in demand. The airline industry solves this problem by offering advance bookings. The benefits of advance booking is that it incorporates some kind of price signal so that people can decide whether they wish to travel or not. However, it will take considerable cultural change for people to modify their discretionary going-out based on fares alone.

shasta 15y ago
Steeply increasing the cost of water bottles or scarce items during a flood or hurricane lessens stockpiling more effectively than rationing. Furthermore, prohibiting "gouging" eliminates the incentive for shops to keep an oversupply of water in case of a hurricane.
- teyc 15y ago
  I couldn't find the article any more, but it was talking about shopkeepers' reluctance to hike the price of bottled water in times of emergency because it harms their long term relationship with a customer. There's nothing wrong with what you talk about in a perfect economic setting. I think humans reason beyond short term economics alone, and an act of graciousness during time of need will be reciprocated in the long run.
- fleitz 15y ago
  Also, increased price after a natural disaster causes the supply side to overcome obstacles such as downed trees, and dangerous hazards such as structurally unsound bridges.

brian_cloutier 15y ago

Are there any companies out there that try to predict these price hikes and recommend the best time for you to do something? As in, "I noticed that you're asking for a cab. If I were you, I wouldn't be in a hurry, ask again in about half an hour and you'll get a much better deal." "I see you're at a bar. You should probably hop into a cab sometime soon, the prices are about to soar." Bonus points if you can use multiple sources at once. "I know that you heard hotels in Houston are going to be expensive next week so you rescheduled your trip for next month, but if you go to these restaurants and use this deal for car rentals, you'll end up saving money overall by going next week." Obviously we're a few years away from those kind of recommendations, but is anybody working on the core idea of predicting when it's best to use a given service?

beagle3 15y ago
FareCast used to do that for flights; It's been bought by Miscrosoft and integrated into bing travel somehow (although I can't tell which of the answers you get there are "organic" and which are "farecast").

stevewilhelm 15y ago

I can predict what will happen next New Year Eve. Riders will hedge against Uber's unpredictable price inflation by demanding the ability to lock in a lower price several days or hours in advance. This "feature" is available now, it's called a limousine service.

ShabbyDoo 15y ago
Let's take it a step further. Uber could provide a futures market for car service. The same economic incentives which drive cattle producers to lock-in the prices at which they will sell their cattle at the same time as they lock-in their feed prices exist for car service. Thinking about staying at the swanky hotel that's located a few miles from the party? Buy a forward contract on car service at the same time you book the room. The issue I see is that, without standardization of "product", it would be hard to create an active marketplace. To a driver, taking someone away from the city to the suburbs isn't as valuable as a route which leads to another customer's point of departure. This, of course, implies that the drivers would also be participating in the futures market. If they noticed, before considering taking NYE off to be with their families, that they could earn $200/hour, they might reconsider. Furthermore, would customers be willing to lock-in service at a particular time? What if the party is still going strong at your appointed time? You could sell your service slot to someone else, but would you be willing to put your contract up for sale while sipping a martini with your significant other? Is there a market design which provides sufficient certainty and price/demand visibility in a way where transactional costs don't destroy the value proposition? Perhaps the ubiquity of pocket "trading terminals" will usher in a new era of dynamic pricing which will require the design of new market models? Next up, concert tickets.

wmf 15y ago

It also looks like they first "round up" to the $15 minimum, then multiply by the dynamic factor.

shalmanese 15y ago

Demand and supply meet at equilibrium when all players in the market are rational and have perfect information. In Uber's case, their poor UI meant that people did not have perfect information and there was a market mismatch. What should have happened is that many people would have realized that paying $50 to drive a mile was absurd and walked, resulting in a more reasonable 2 - 3x surcharge rather than an insane 6x surcharge.