Uber’s Surcharges Demonstrate The Harsh Reality Of Dynamic Pricing
techcrunch.com
techcrunch.com
If the UI was right, the prices wouldn't have increased to more than $50 per mile since demand would have likely decreased when the rate was about $20 per mile.
The thing about market forces is that the buyer needs to be aware of the price in order to make a rational decision that affects demand and alleviates the strain on existing supply. Uber's app indicated I would be informed of the additional charge prior to my ride, but that certainly never happened. In that regard, I feel slighted and my feelings toward the company have been damaged as a result.
In London it's almost impossible to get a black cab on NYE. Black cabs have their fares capped by regulation to something like 3x the regular fare. As such, it's not lucrative to work that night for such a small difference when they could be with their families.
Minicabs on the other hand are not capped, and are largely unregulated. Many of them do work precisely because they can charge much higher rates, and they do.
I once got a minicab on NYE that cost over £170 for a journey that should have cost closer to £30. Caveat emptor.
What seems to be the case here isn't the market doing what the market does best (regulate supply and demand and the cost thereof), but the naivety and optimism of the consumer who hopes for cheap prices despite a severe spike in demand and a shortage in the supply able to meet the demand.
The last time I needed a cab on NYE, I chose to walk the 11 miles home. I was drunk, I was singing New Order most of the way. I actually really enjoyed the walk and saved myself a lot of money in the process. I've lost my naivety around cab fares on that night.
As in, "I noticed that you're asking for a cab. If I were you, I wouldn't be in a hurry, ask again in about half an hour and you'll get a much better deal." "I see you're at a bar. You should probably hop into a cab sometime soon, the prices are about to soar."
Bonus points if you can use multiple sources at once. "I know that you heard hotels in Houston are going to be expensive next week so you rescheduled your trip for next month, but if you go to these restaurants and use this deal for car rentals, you'll end up saving money overall by going next week."
Obviously we're a few years away from those kind of recommendations, but is anybody working on the core idea of predicting when it's best to use a given service?
The phrase "Price gouging" comes to mind. Even when dynamic pricing is available, as long as people are stuck, they will feel resentment.
Another example is when there are hurricanes or floods. Shops could charge "market pricing" for bottled water, but this only generates ill-will. What shops do is to ration the supplies so that all those who need bottled water get some.
The problem with cabs is you can't implement rationing. Furthermore, supply is always going to be tight even if all the limousines came out in full force. It is one of those once-a-year spike in demand.
The airline industry solves this problem by offering advance bookings. The benefits of advance booking is that it incorporates some kind of price signal so that people can decide whether they wish to travel or not. However, it will take considerable cultural change for people to modify their discretionary going-out based on fares alone.
There's nothing wrong with what you talk about in a perfect economic setting. I think humans reason beyond short term economics alone, and an act of graciousness during time of need will be reciprocated in the long run.
And we have plenty of health and safety regs that prohibit, for example, ordering an employee to drive on an unsafe bridge, so that concern is rather a red herring.
Reputationally, someone who gives away water during emergency, especially at tremendous cost to themselves get far better returns in the long run after the emergency. Similarly, people who take advantage of others during bad times are often punished or sanctioned later.
You have to understand that humans think very differently to Ferengi-style pure economics. Reputation matters. Back to the topic matter - Uber should consider hiring anthropologists in addition to their nuclear scientists when thinking about dynamic pricing.
The issue I see is that, without standardization of "product", it would be hard to create an active marketplace. To a driver, taking someone away from the city to the suburbs isn't as valuable as a route which leads to another customer's point of departure. This, of course, implies that the drivers would also be participating in the futures market. If they noticed, before considering taking NYE off to be with their families, that they could earn $200/hour, they might reconsider.
Furthermore, would customers be willing to lock-in service at a particular time? What if the party is still going strong at your appointed time? You could sell your service slot to someone else, but would you be willing to put your contract up for sale while sipping a martini with your significant other? Is there a market design which provides sufficient certainty and price/demand visibility in a way where transactional costs don't destroy the value proposition?
Perhaps the ubiquity of pocket "trading terminals" will usher in a new era of dynamic pricing which will require the design of new market models? Next up, concert tickets.
What should have happened is that many people would have realized that paying $50 to drive a mile was absurd and walked, resulting in a more reasonable 2 - 3x surcharge rather than an insane 6x surcharge.
I'd be very interested, though, to know how much of the increase (~6x normal according to a screenshot on their site) is passed along to the driver.
But, either way, I'm fine with this practice. The only possible controversy is how well they inform their customers that it will happen, and how clear it is on their app what the price will be. It would be bad for them to have a bunch of customers expect to easily get an Uber on New Year's Eve, then be disappointed by lack of availability or high prices.
I wonder why Uber does this? Is it mainly an incentive for their drivers (to get as many on the road during a high-stress time)? Or is it because they would rather have customers see high prices than to see zero availability?