The Morality of Surge Pricing
Russ Roberts
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Many of us assume that Uber’s surge pricing is based only on supply-versus-demand. This is a false assumption. Uber controls surge pricing and probably uses it in interesting ways.

For most riders, surge pricing within the Uber app is the sole source of information about supply versus demand. This means Uber can shape riders’ perceptions of how much surge pricing is reasonable at any given time. And it would be consistent with Uber’s role as a pre-IPO company to shape those perceptions to maximize profits.

The following are hypotheses based on my observations of Uber surge pricing, the visibility of active unoccupied drivers in the Uber app, and from talking with Uber drivers: Even when there is an adequate supply of active unoccupied drivers, Uber might apply surge pricing when:

  • Potential riders expect more scarcity, regardless of how much scarcity exists (Popularly expected scarcity). (e.g., Saturday night)
  • Many riders have a predictably increased urgency (Widespread predictable urgency). (e.g. Monday morning rides to work)

Furthermore, it is possible that Uber does not apply surge pricing equally to all users. As potential riders, when we install the app, we give Uber permission to gather our personal data from our use of the app and from other data sources on our smartphones. This data is perfect for applying dynamic pricing on an individual level.

Morality is irrelevant here. Uber has a goal to provide a service of value and to earn as much as possible by providing that service. When we sign up for their service, we consent for them to use this data. When we request a ride, we consent to pay the pricing in effect at that time. To paraphrase Russ Roberts: “if you don’t like it, take a hike.”

However, nothing would piss Uber’s customers off more than feeling like they are personally being taking advantage of. It is almost an unwritten a social contract in G8 countries; customers expect fair and equal pricing. This is the complete opposite of pricing in traditional marketplaces, where pricing is based on your negotiation skills and perceived social status (appearance, clothing, skin color, religious signifiers, education).

My guess is that we find individual pricing abhorrent because: 1) it is inherently discriminatory; and 2) it interferes with one of our core economic practices — price comparison shopping. If you want to test this notion, try the following real-world experiment at your next garage sale: When someone offers you $X for an item, respond: “Based on your appearance and estimated income, I think you should pay ($X + $Y) for that item.” While you say that, watch their facial expressions change and prepare to duck.

Do you recall Amazon’s experiments with dynamic pricing five years ago? When customers used multiple computers to look up the same item, they discovered that Amazon was quoting different prices. This led to the discovery that Amazon was raising prices based on individual customer’s spending habits. A ferocious backlash and public relations disaster ensued.

Here, Uber’s pricing information is much harder to correlate and compare than Amazon’s. Their terms of service specifically forbid data mining prices and other information. They are notoriously quiet and unspecific about of their pricing practices. None of this is surprising or unexpected. Just don’t be naive about what their pricing model might actually be.

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