Why does Uber have surge pricing?
Uber is a Marketplace that matches riders and drivers. In the same way that Ebay lets a seller offer an item, and multiple buyers bid on that item, Uber does the same thing when you request a ride. Instead of highest bid being the deciding factor, it is criteria like distance, direction, # of seats, and which driver clicks “accept” first (your ride request gets sent to multiple drivers).
Surge pricing is an attempt to deal with a constrained or limited resource on the Marketplace — drivers and cars. If Uber has 100 cars on the road and 200 people requesting rides, there is not enough “supply” to go around. So what do you do?
You have a few options:
- Make a queue. First come first serve. This means you might wait an hour for the next available car and will be rider 150/200.
- Immediately reject ride requests if there are no available drivers. “Sorry, no cars available.”
- Introduce an incentive that attempts to balance the supply and demand since they are basically mismatched.
Surge is both a disincentive for riders and an incentive for drivers. If the price increases it makes riders think twice about taking that trip. Maybe they can wait until later or use an alternative mode of transportation.
When the price rises for drivers, it is an incentive for them to head towards a particular area that is surging or for drivers who aren’t even online to start driving because now they can make more money. Yes, when surge activates in an area (and it is automatic) notifications go out to drivers that are not current driving that they can make more money right now if they hop online and head to this area. The bigger the supply/demand mismatch, the higher the incentive.
Surge will increase the number of drivers available (supply) and lower the number of people requesting rides (demand) in an attempt to balance the Marketplace. When you pay more for a trip — most of that money goes to the driver. It is a driver incentive. Surge is designed to ensure that you can always get a ride whenever you want.
Surge works pretty well most of the time and is completely automatic. There are certain situations you may want to deactivate surge, however, as the optics may not be ideal. What if there’s a natural disaster? Or a protest? These are events outside of your control and not normal market conditions, so you don’t really want to appear to be taking advantage of the situation.
If you were to disable surge when there is a supply and demand mismatch a few interesting things happen:
- There is no incentive for riders to take a trip later. Demand increases because higher cost is no longer there to relieve the pressure
- There is no incentive for new drivers to come online or existing drivers to head to that area
- Drivers make less money, in conditions where the market has decided that they should be making more (heavy traffic, dangerous road conditions, etc)
- Riders will get the dreaded “No cars available” message if attempting to take a trip or get added to a queue
You’ll basically be stuck.
[ Note: I am currently an employee of Uber. Everything here is my own opinion and does not reflect Uber’s. I may be 100% wrong about everything I’ve typed here. Take it with a grain of salt. This is basically a standard disclaimer. I wrote this entry after realizing that many of my rather intelligent and well-intentioned friends had no idea how surge worked or what it was trying to accomplish. ]