Could Uber fix surge pricing with ride scheduling?
Uber’s surge pricing mechanism has long been the target of many very public complaints, including an infamous “F” rating from the Better Business Bureau. Despite this, economists recognize surge pricing as elegant solution to an obvious problem. Usually Uber operates in near perfect economic equilibrium with drivers supplying rides as users request them. Ride requests are accepted in seconds, and in most cases users don’t have to wait more than five minutes before their driver has arrived. When ride demand increases, however, Uber is left with a driver shortage that leads to a higher equilibrium price. In fact, surge pricing can be most easily justified by quickly glancing at the four basic laws of supply and demand:
- If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
- If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
- If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
- If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.
The goal for Uber, then, is to balance available drivers (supply) with riders (demand). Surge pricing is the most obvious and effective means of doing this.
But could Uber be doing even more? Regardless of how elegant and obvious surge pricing is as a solution, it leaves a bad taste in users’ mouths and armchair economists have even begun accusing Uber of price gouging. What else could the team at Uber do to restore equilibrium during demand spikes? My solution: ride scheduling.
By pairing riders with drivers ahead of time, Uber could mitigate unexpected demand spikes. If we imagine that riders were incentivized to book in advance with a truly consistent rate (i.e. surge did not apply) and that drivers accepted scheduled rides when they were scheduled rather than at the time of the ride, Uber could begin to move toward a point where a majority of their rides had already been fully scheduled with both riders and drivers. Of course, this does nothing to actually reduce demand or increase supply, but it could still mitigate surges by creating a more efficient marketplace. It would be difficult to know how much time is currently wasted between rides, while drivers drive around, sometimes aimlessly, awaiting new jobs. If we imagine that an Uber driver could book back to-back rides for an entire evening it’s not hard to see that scheduling would increase efficiency. Demand spikes surrounding organized events like concerts and sporting events, could be better anticipated and fulfilled. Of course, riders who choose not to schedule would still suffer some sort of surge rate, perhaps an even greater one since other drivers would have scheduled rides to fulfill, but the responsibility for this surge is now that of the users.
In addition to the obvious benefits of a ride scheduling feature, I believe that if properly executed, ride scheduling could help mitigate surge pricing. Of course, it isn’t a perfect solution, and wouldn’t altogether solve market imbalances that create surge pricing, but by pairing riders and drivers ahead of their actual interaction we open up many other opportunities for increased efficiency such as increased driver route optimization or enhanced Uber Pool coordination.
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