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.
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.
Uber: Will Surge Pricing be the end of Uber or will Uber end It? by Mike Blumenthal