Uber: Will Surge Pricing be the end of Uber or will Uber end It?

zp50ciza7v1luawwqivtI have been thinking about this question a lot since receiving the above tweet. Users do have a choice to either use or not use Uber. Why then is there such outrage?

And while I am not sure I have an answer, I have a lot of questions and in the end, I question Uber’s use of surge pricing and think it likely to come back and haunt them to the point that they will curtail it.

We all move through life modeling reality. Uber and its creators are no different in that regard. They are apparently using the current economic model (neoclassical) to implement their surge pricing forumulas.

Price theory [under current economic theory] asserts that in a free market economy the market price reflects interaction between supply and demand: the price is set so as to equate the quantity being supplied and that being demanded. In turn these quantities are determined by the marginal utility of the asset to different buyers and to different sellers“.

Uber’s logic of surge pricing is imepecable. They have studied supply and demand and have found that by increasing pricing they in fact bring out more drivers, drive demand down and in effect achieve a supply/demand equilibrium. So good so far.

The problem? Neoclassical economics has several assumptions at its core:

  • People have rational preferences between outcomes that can be identified and associated with values.
  • Individuals maximize utility and firms maximize profits.
  • People act independently on the basis of full and relevant information.

The real world, as Uber is learning, has little relationship to those core assumptions. People often use other systems, besides reason, to judge things, individuals are not solely maximizers and there is never full information.

Many people use ethics and morals to make decisions not reason or utility. These are codes that are deeply embedded in the society in which they live and affect behaviors more than we realize.

In this case, Just Price Theory, is the line of thinking that society has integrated to its core. First articulated by Aquinas, it “attempts to set standards of fairness in transactions“. While it isn’t in widespread use by current economists it forms the basis of many our laws against usury and formal responses to price gouging.

More importantly it is embedded in the thinking of many, if not all, in our culture. Enough people think that surge pricing is plain, out and out  unfair, market logic be dammed, that Uber has taken a real hit on the popularity front.

People make these sorts of ethical and moral decisions all the time against companies like WalMart, McDonald’s and GM. These companies are behaving as most capitalists do, in maximizing profits. But paying workers nothing or lying about people dying goes beyond the pale for many of us and it becomes a reason to not do business with them.

And apparently, now Uber is being judged by this same standard. They have recently joined the list of America’s Most Hated Companies, scoring slightly worse (better?) than McDonald’s and Bank of America but better (worse?) than even Walmart. That was quick… from America’s tech darling to one of the most hated in 60 seconds months flat.

Uber isn’t stupid. They do learn. In many countries they have started to take a more measured approach to their arrival and their willingness to work with local authorities and cultural norms. It makes sense that many social norms are more embedded in European countries and that it behooves Uber to take them more into account as they move forward.

However, even in the world’s most cowboy economy, ours, Uber is taking hits frequently and users are attempting to delete Uber*.

Ultimately, even the freewheeling Uber, will have to learn that their model of the world doesn’t match reality. More and more people will choose alternatives.

While current economic theory might be able to predict a market response, it fails miserably in predicting a human response. We are social creatures after all and social functions play a role in the outcome of our daily transactions, neoclassical theory be dammed.

Uber can continue to fight reality or change it.

Or more likely they will change their behaviors. My guess is that they will be forced to remove or soften their surge pricing model as well as their approach to local regulation.

They should also read some other books on pricing.

* My daughter attempted to delete her name from Uber and got no end of grief in response. After filling out the forms, she had to call and literally argue with the phone attendant to have her name removed from their lists.

 

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10 thoughts on “Uber: Will Surge Pricing be the end of Uber or will Uber end It?”

  1. Great write-up Mike. I use Uber every week. When I first read the subject I thought – “what is the problem – they’ve adjusted the way the indicate surge pricing, so it’s just a choice”.

    But after reading your article I agree with what you are saying – “People often use other systems, besides reason, to judge things, individuals are not solely maximizers and there is never full information.” (we are emotional beings – we all do this)

    Uber is learning this the hard way and will need to adapt or suffer the consequences.

  2. Indeed agree with your line of thought. Never used Uber before but they must make an attempt to adjust to the realities, instead of trying to sit on a high horse of sorts, formulate strange theories, try to dictate terms and expect people to follow them, they must realize that people have other options to explore also.

  3. Perhaps Uber will become a Google – a system so entrenched in our day-to-day lives that searching for new alternatives and competition is discouraged. That thought is troubling, but plausible.

    Personally, I do appreciate Uber’s service (their fight against safety regulation and poor marketing practices are another matter). They are cheaper than local taxis, eliminate the need to run cards/find cash, and have a fast response time. Of course I have the option of using other services as I did before Uber. They are just not convenient. During peak hours I can call another taxi service, but the wait time is often terrible and I’ve had taxis just not show up when it’s late and I’m alone. In those instances, if the price surge is reasonable, I would even be inclined to use Uber. If it’s absurdly high, I would just wait until it came down. However, it’s generally easy to predict peak usage — if I plan to be out, I would keep that in mind and adjust plans accordingly.

    Neoclassical economics at its best. A 19th century system to solve 21st century problems. Uber is acting as most profit centric businesses would under the system. Their predatory nature is a symptom of a system that needs dramatic changes.

  4. This discussion reminds me of the book “Catching Lightning in a Bottle,” by Winthrop Smith, one of my classmates at Amherst College. The book describes the rise of Merrill Lynch, a client based stock broker company, dedicated to helping the little guy create investments in the stock market. Ten years before the company went bankrupt and was taken over by Bank of America, the members had elected a CEO who changed the company philosophy. He started laying off employees and cutting costs and services, with the intention of maximizing profits. When the company went under, he walked away with a stash of cash, but in the process he had destroyed a healthy part of corporate America.

  5. The Uber guys can change or go the way of Sears. They were purchased by a hedge fund manager, Eddie Lampert, that knew nothing of retail. He decided he would implement his pet economic theories based on the novelist Ayn Rand.

    According to his interpretation of Rand individuals thrived under competition so he made different segments of his company compete against each other. Soon the overall brand was damaged as everyone was looking out for their departments, not the overall company.

    http://www.alternet.org/economy/eddie-lampert-and-ayn-rand

  6. Thanks for the foray into economics. I found it fascinating. I don’t think price gauging could ever work for long. I know a lot of people who love Uber, however, so I’m suprised to hear they are one of America’s Most Hated Companies.

  7. Now that Uber is even in the car loan business and charing usurious interest of above 25% people should probably be careful before signing up with them. They are using subprime lenders with such outrageous rates that people are forced to drive for them and Uber retains all earnings.

  8. Interesting that it became hated by passengers for surge pricing. I know that drivers have been talking about getting less surge pricing lately so maybe that is why.
    On the other hand, if surge pricing goes away, then maybe ultimately more drivers will stop complaining about it and find other jobs or stop driving in the middle of the night after bars close, which is why surge pricing was invented in the first place.
    I firmly believe that supply and demand will win out over public opinion eventually.

    1. @Julie
      Supply and demand is an economic theory to explain pricing across a whole market. When individuals experience in their daily lives they don’t experience a theory they experience a shocking reality that is affecting them directly and immediately not a whole market. While there may be benefits to them, it typically does not feel that way to the individual. So I doubt that consumers will be won over IF the price shifts are too great.

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