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How Uber Surge Pricing Really Works
minstrelmike writes with this analysis from Nicholas Diakopoulos of the Washington Post: At the core of Uber's wild success and market valuation of over $41 billion is its data and algorithmically fueled approach to matching supply and demand for cars. It's classic economics, supposedly....but is Uber's surge pricing algorithm really doing what they claim? Do surge prices really get more cars on the road?
My analysis suggests that rather than motivating a fresh supply of drivers, surge pricing instead re-distributes drivers already on the road. Adds minstrelmike: The writer goes on to analyze 4 weeks of pricing info from 5 areas in D.C. and plotted prices versus wait times. "Price surging can work in any of three ways: by reducing demand for cars (less people want a car for a higher price), by creating new supply (providing an incentive for new drivers to hit the roads), or by shifting supply (drivers) to areas of higher demand."
It moves current drivers from one side of town to the other. It does not put new drivers on the road. It can't because the prices change every 3-5 minutes."
My analysis suggests that rather than motivating a fresh supply of drivers, surge pricing instead re-distributes drivers already on the road. Adds minstrelmike: The writer goes on to analyze 4 weeks of pricing info from 5 areas in D.C. and plotted prices versus wait times. "Price surging can work in any of three ways: by reducing demand for cars (less people want a car for a higher price), by creating new supply (providing an incentive for new drivers to hit the roads), or by shifting supply (drivers) to areas of higher demand."
It moves current drivers from one side of town to the other. It does not put new drivers on the road. It can't because the prices change every 3-5 minutes."
Price gouging laws predominately apply in a period of civil emergency and only to items that that are necessary for survival.
I'm not sure why the submitter/story takes a conspiratorial tone about surge pricing but then proceeds to basically explain that surge pricing successfully solves two of three scarcity problems.
The most immediate way to increase supply is to reallocate available resources to where demand is higher. You WANT cars on the road now to go where there is greater demand.
Price increaes help reduce demand from people with lower priority travel requirements and allow those with higher priority travel obtain transportation by allowing them to use willingness to pay a signal of their greater needs.
The only thing it appears to be failing at is increasing the aggregate supply. Uber many need to provide an additional incentive to draw in inactive drivers, like some kind of bonus for drivers inactive for the N previous hours to become active again (such as guaranteeing at least one surge priced fare if surge pricing stops before they can obtain a fare within some time window, even if Uber has to cover the differential).
The only conspiracy in my mind with surge pricing would be if Uber enables it WITHOUT a concurrent increase in demand. If they are just enabling it because its raining even if there's no increase in demand, they're just opportunistically increasing fares. I might buy into the notion that they may be predictively enabling surge pricing IF they coud produce the data that says that some event X results in a Y percent demand increase historically; in that case they may actually be signalling additional supply and doing some good.
This writer is a total idiot.
As a former uber driver this is 100% false. What happens is over a week or two, the times when surge is likely become known to drivers. Some drivers (such as myself) generally only want to drive during periods with likely surge demand. Uber actually exposes this to the driver over time (as does Lyft etc) - with peak and prime time discussions, history etc, and you have an earnings report that shows this.
Basically, check weather for the week. If it's going to be raining at the morning or evening commute or dinner hour, fire up the car - you were much more likely to see surge pricing (basically when it's raining even after price goes up demand tends to stay up).
If it's not raining, surge tends to drive demand down I've noticed. Folks walk, bus, wait, do an errand etc. For riders willing to pay service quality (ie, wait time) remains pretty consistent - so if you've GOT to get the that job interview / meeting, you can still count on uber (at a higher price).
It seems to work pretty well.
I'd be much more interested if this "wonk" actually had a better system. It's easy to poke holes in someone elses approach, but I've often found asking these kind of folks to design their own system is eye opening, they often know FAR less about the subject then they claim.