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"No, surge pricing is to get more drivers to go to the area with high demand to pick up the people who eagerly want to leave." That's what Uber claims all the

"No, surge pricing is to get more drivers to go to the area with high demand to pick up the people who eagerly want to leave." That's what Uber claims all the time. Why does every one believe their very own narrative? Why isn't it enough to tell their drivers that there is business at location X and they'll show up? I mean, like it normally works too.

mseebach 12y ago
Because Econ 101. The article mentions that at 4x surge pricing, the minimum cost was $100. That implies that normal minimum cost is $25. For $25, you can go several kilometers in a regular taxi[1] - ie, Uber, even at normal rates, represents a significant premium over regular taxis. If you're correct, that merely telling people that there's a spike in business somewhere means supply will flock to the demand, then it follows that there would be plenty of regular and much cheaper taxis for people to take. So, if you're correct, the only people who would take Ubers in the area are the people who love Uber so much that they will pay a premium of maybe $80 for the privilege of fleeing a scene of terrorism in an Uber rather than a taxi. Or, maybe you're wrong: Perhaps merely telling taxi drivers that there's business available is not in fact enough to get them to go take it. 1: http://www.taxifare.com.au/rates/australia/sydney/ http://www.taxifare.com.au/rates/australia/sydney/
- spacefight 12y ago
  I simply refuse to believe, that the _only_ effective way to tell drivers of any service (Uber, Lyft, regular cabs) that there is a huge demand somewhere is to hike the price x times. Of course I might be wrong - I haven't tried to run a cab service ever. Edit: Or asked differently - why is surge pricing 4x or sometimes even 5x? Why isn't it like 1.10x? My guess it's profits 101.
  - dllthomas 12y ago
    I've definitely heard rumours of drivers that drive only during surge periods. No idea as to the veracity, but clearly the higher you hike the price the more people will find driving worthwhile.
    - mseebach 12y ago
      I suspect that's unlikely. The drivers I've talked to (London) say that surges are short and geographically isolated: They're only worth it if you're already on the road and fairly close to the affected area.
      - dllthomas 12y ago
        Good point. On reflection, I suspect the context was predictable surges (New Years Eve, &c).
  - mseebach 12y ago
    Well, now you're moving the goal-posts. Nobody insists that this is the only way. But it's a way, and it appears to work well - and it's perfectly consistent with one of the most basic and uncontroversial tenets of economics. It's obvious that Uber is an experiment on many levels. Their approach to public policy and regulation is one, another is whether users will accept a priority of better availability over uncertainty of prices (and so the risk of feeling fleeced), rather that the "old style" total certainty of prices over uncertainty of availability.
- nerfhammer 12y ago
  Depends on the relative elasticity of supply and demand. 1) If demand becomes more inelastic with respect to price, you can raise prices more than you will reduce rides, allowing uber to pocket more money. 2) If supply is elastic with respect to price, more drivers will be ready to provide rides as prices increase. Uber is saying it's purely case 2 because that sounds like better PR, but any profit-maximizing business that knows any marketing 101 is going to seriously interested in case 1. case 2 is questionable - how elastic is the supply? The supply of drivers is limited - there are only so many uber drivers. The question is, if you raise prices 4x, will you get 4x as many drivers or something less than that?
  - mseebach 12y ago
    If you can raise your price without reducing rides (1), your prices are too low to begin with. Does Uber really strike you as the kind of company that would leave money on the table like that, only incur the wrath of users by raising the price when it rains? That's really poor marketing. > The question is, if you raise prices 4x, will you get 4x as many drivers Nothing in the surge pricing argument is predicated on that relationship being in place. As long as the relationship is positive, surge pricing works. Presumably, Uber has a data-driven model that allows them to calculate which level to surge to to satisfy a given demand - which is probably the same model they use to set base prices - if the model consistently suggests a 0.9x surge, it means they should lower the prices, which, incidentally they did in London four months ago (also in direct contrast to your case 1).
    - nerfhammer 12y ago
      > If you can raise your price without reducing rides (1), your prices are too low to begin with. Yes (ignoring the possibility of wanting to discourage long-term competition by keeping margins low), from a profit-maximization perspective, but not necessarily a quantity-of-rides maximization as uber claims. > only incur the wrath of users by raising the price when it rains? That's really poor marketing. Some would argue that surge pricing is already poor marketing, given the negative reaction people intuitively have to it > As long as the relationship is positive, surge pricing works. No, depends on the elasticity of demand. If demand is unit elastic then an increase in price will result in a equivalent decrease in rides. In order for surge pricing to increase the quantity of rides supplied supply has to be more elastic than demand.

mseebach 12y ago

Because Econ 101. The article mentions that at 4x surge pricing, the minimum cost was $100. That implies that normal minimum cost is $25. For $25, you can go several kilometers in a regular taxi[1] - ie, Uber, even at normal rates, represents a significant premium over regular taxis. If you're correct, that merely telling people that there's a spike in business somewhere means supply will flock to the demand, then it follows that there would be plenty of regular and much cheaper taxis for people to take. So, if you're correct, the only people who would take Ubers in the area are the people who love Uber so much that they will pay a premium of maybe $80 for the privilege of fleeing a scene of terrorism in an Uber rather than a taxi. Or, maybe you're wrong: Perhaps merely telling taxi drivers that there's business available is not in fact enough to get them to go take it. 1: http://www.taxifare.com.au/rates/australia/sydney/ http://www.taxifare.com.au/rates/australia/sydney/

spacefight 12y ago
I simply refuse to believe, that the _only_ effective way to tell drivers of any service (Uber, Lyft, regular cabs) that there is a huge demand somewhere is to hike the price x times. Of course I might be wrong - I haven't tried to run a cab service ever. Edit: Or asked differently - why is surge pricing 4x or sometimes even 5x? Why isn't it like 1.10x? My guess it's profits 101.
- dllthomas 12y ago
  I've definitely heard rumours of drivers that drive only during surge periods. No idea as to the veracity, but clearly the higher you hike the price the more people will find driving worthwhile.
  - mseebach 12y ago
    I suspect that's unlikely. The drivers I've talked to (London) say that surges are short and geographically isolated: They're only worth it if you're already on the road and fairly close to the affected area.
    - dllthomas 12y ago
      Good point. On reflection, I suspect the context was predictable surges (New Years Eve, &c).
- mseebach 12y ago
  Well, now you're moving the goal-posts. Nobody insists that this is the only way. But it's a way, and it appears to work well - and it's perfectly consistent with one of the most basic and uncontroversial tenets of economics. It's obvious that Uber is an experiment on many levels. Their approach to public policy and regulation is one, another is whether users will accept a priority of better availability over uncertainty of prices (and so the risk of feeling fleeced), rather that the "old style" total certainty of prices over uncertainty of availability.
nerfhammer 12y ago
Depends on the relative elasticity of supply and demand. 1) If demand becomes more inelastic with respect to price, you can raise prices more than you will reduce rides, allowing uber to pocket more money. 2) If supply is elastic with respect to price, more drivers will be ready to provide rides as prices increase. Uber is saying it's purely case 2 because that sounds like better PR, but any profit-maximizing business that knows any marketing 101 is going to seriously interested in case 1. case 2 is questionable - how elastic is the supply? The supply of drivers is limited - there are only so many uber drivers. The question is, if you raise prices 4x, will you get 4x as many drivers or something less than that?
- mseebach 12y ago
  If you can raise your price without reducing rides (1), your prices are too low to begin with. Does Uber really strike you as the kind of company that would leave money on the table like that, only incur the wrath of users by raising the price when it rains? That's really poor marketing. > The question is, if you raise prices 4x, will you get 4x as many drivers Nothing in the surge pricing argument is predicated on that relationship being in place. As long as the relationship is positive, surge pricing works. Presumably, Uber has a data-driven model that allows them to calculate which level to surge to to satisfy a given demand - which is probably the same model they use to set base prices - if the model consistently suggests a 0.9x surge, it means they should lower the prices, which, incidentally they did in London four months ago (also in direct contrast to your case 1).
  - nerfhammer 12y ago
    > If you can raise your price without reducing rides (1), your prices are too low to begin with. Yes (ignoring the possibility of wanting to discourage long-term competition by keeping margins low), from a profit-maximization perspective, but not necessarily a quantity-of-rides maximization as uber claims. > only incur the wrath of users by raising the price when it rains? That's really poor marketing. Some would argue that surge pricing is already poor marketing, given the negative reaction people intuitively have to it > As long as the relationship is positive, surge pricing works. No, depends on the elasticity of demand. If demand is unit elastic then an increase in price will result in a equivalent decrease in rides. In order for surge pricing to increase the quantity of rides supplied supply has to be more elastic than demand.