Uber starts to improve their surge pricing public relations

Submitted by brad on Wed, 2015-01-28 14:48
Topic: 
Transportation

Uber's gotten a lot of bad press over its surge pricing system. As prices soared during Storm Sandy and a hostage crisis in Sydney, people saw it as price gouging when times are tough.

I've always thought the public reaction to price gouging in times of scarcity and emergency was irrational. While charging double or triple for food, rides or generators does mean that the rich get more access to them, it also does at least a partial job of assuring that people who truly need or want things the most get access over those who need them less. I do not quite understand why the alternative -- keeping prices flat, and allocating items to whoever gets there first -- is so broadly preferred.

Uber has promoted another reason to have surge pricing. They argue that as they raise the prices, it causes an increase in supply. Unlike generators, where there are only so many in the stores during a storm, doubling the price of a ride can mean a sudden influx of rides, both from people in the area and even those who rush in from outside to make the extra buck. I suspect that does happen, but Uber also makes more money and poorer people are priced out of the market, which has been a PR nightmare.

For the recent snowstorm that didn't end up being too bad in NY, Uber announced some new policies -- a cap of 2.8x on the price increase, and donation of all proceeds to the Red Cross. The mayor of New York even declared the surge-pricing was illegal.

It's an interesting start, but what do they mean by all proceeds? If they're not increasing the income of the drivers -- many of whom are low enough income that the double-time or more rates can make a real difference -- then they are defeating the whole point of this.

Here are some potential ideas I was thinking about for how to play surge pricing:

  • Keep Uber's fee during a surge the same. Ie. it's always 20% of the rack rate, not of the surged price. So Uber is making no extra money (except from the extra volume,) just the drivers.
  • To get really extreme, Uber could reduce its cut as volume increases, so they don't even make money from the increased volume.
  • They could just donate all their cut (which may be what they mean when they say all proceeds.)
  • The extra could be split between drivers and a charity. You get more drivers, and they make more, but good deeds are also done.

Another option would be to do something like a "buy one give one" as we've seen in physical products. This would mean that during the surge, riders could elect to pay more to get priority (and to attract drivers.) But if the surge is for 2x, they might pay 3x, and the overage would go to provide a regular priced ride (1x) for somebody else, while still paying the driver 2x.

The tricky part is how to make sure the subsidized rides only go to those who can't afford to pay the surge price. The subsidized rides will presumably still be in short supply. You want them to go only to those who truly need them. Options might include:

  • Offer subsidies primarily for those who use UberX almost exclusively. Use a lot of black car and you don't get a subsidy. (Yes, some people use black car on expense account and UberX on personal rides, including myself, so this is not perfect.)
  • Require a declaration of low income. Subject those who declare low income to random audits after the fact, pulling up credit scores or asking them to actually demonstrate the low income. If they lied, charge them the full amount plus a penalty for all subsidized rides they took.
  • Drivers could also elect to subsidize, and say they will drive for 1x, or any other amount, to really increase the supply of subsidized rides and the amount of subsidy. They might get a tax donation receipt for doing so if Uber could set up the tax structures properly with a non-profit. (A non-profit would probably need to work over all companies or be fully independent of the company.)

As already happens with the surge system, adjust the surcharge and subsidy to try and make demand match supply.

You could even offer rides to those in need for 0.5x, a flat fee, or even nothing, though nothing is very easy to abuse.

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Comments

Frank Ch. Eigler

Wed, 2015-01-28 16:49

"I do not quite understand why the alternative — keeping prices flat, and allocating items to whoever gets there first — is so broadly preferred."

It's because people have not benefited from a proper education about economics, and have been instead told that profit and money are bad, bad, bad. This may be at least as big a problem as the (putative) shortage of STEM education.

DensityDuck

Wed, 2015-01-28 20:18

People who use Uber as their basic mode of transport--which is what Uber wants--get hosed by surge pricing, because how do you plan for that cost risk? If I take an Uber somewhere I need to ensure that I can handle paying ten, twenty, fifty times as much to return because of a surge?

Uber claims that surge pricing encourages people to provide rides. Which should be easy enough to show happening--just release the data for "number of active Uber drivers" in Sydney before, during, and after the price surge.

brad

Thu, 2015-01-29 00:57

Ah, so people doubt that the surge pricing actually works at increasing the driver count? I personally trust them that it does, but this gets me back to the other question, namely why is it superior to keep the price low and happen to allocate the rides to those lucky enough to request them at the right time. Without the surge pricing, those people who would select it as their main transport will find themselves stranded if they are not one of those to get a car, as opposed to being able to decide how much they really want one.

Why is luck better than money?

DensityDuck

Mon, 2015-02-09 10:47

"why is it superior to keep the price low and happen to allocate the rides to those lucky enough to request them at the right time[?]"

It's not the basic cost, it's the risk of that cost suddenly exploding beyond what people are able to pay. You're falling back on "well this is just an example of how a market efficiently allocates resources in times of increased demand", but that is in fact a very privileged position. A surge price that's an inconvenience for you might mean that someone else can't afford an Uber ride, where they could before the surge.

And sure, "that's the risk you take when you choose Uber", but maybe a public-facing company that wants to position itself as radically democratizing the city transit industry needs to think about whether they want people thinking "if I use this service I might not have enough money to get back home, and I won't know until the instant I try to hire a return trip".

"Without the surge pricing, those people who would select [Uber] as their main transport will find themselves stranded if they are not one of those to get a car..."

uh

the whole concern is that with the surge pricing, those people who would select Uber as their main transport will find themselves stranded because they can't afford a car.

brad

Mon, 2015-02-09 11:37

As I have noted, if there's a shortage of rides, then somebody who wants or was depending on the service is not going to get it. Some method has to allocate the rides to the riders, the only question is which method?

If it's price, then yes, it allocates to the wealthy and the most desperate. And if that were the whole story, we could discuss the issue about whether that's unfair compared to doing it by luck, or first-come-first-served which don't correlated with need at all.

But that's not the whole story because raising the price should increase the supply. If I'm an Uber driver and I've driven 8 hours and went home to relax, then a doubling of the pay is going to get me back in my car. If I'm 20 miles away from the high demand area it's going to get me to take the time and cost to drive there. So even if we think it's evil for wealth to be a factor in the allocation compared to luck or even inverse wealth, I don't think that matters, because bringing in all those extra drivers helps everybody.

Today, if you're poor, you didn't give up having a car to use and depend on Uber. Someday that will change, with robotaxis, but I doubt it's true much today. If you can afford a car, but decided not to, you can afford a triple price ride in an emergency.

DensityDuck

Tue, 2015-02-10 10:59

"Today, if you’re poor, you didn’t give up having a car to use and depend on Uber."

Wow, just wow. If you're poor, Uber is not for you.

"if there’s a shortage of rides, then somebody who wants or was depending on the service is not going to get it."

You allow that someone might depend upon the Uber service being available, but then you say that it's acceptable for people to be priced out of using the service (or have to allocate far more resources to using it than they planned, to the point where they might forego other needs in order to use transportation.)

Here's a question: Do you think that Net Neutrality is something that should be enforced? If so, why? Surely companies who want to use scarce bandwidth resources should understand that in times of high demand the providers ought to be permitted to charge more, thereby encouraging them to take steps to provide additional bandwidth.

"if that were the whole story, we could discuss the issue about whether that’s unfair compared to doing it by luck, or first-come-first-served which don’t correlated with need at all."

You're assuming that people take Uber rides for kicks, or because they don't feel like walking. What about the people who take an Uber somewhere that they can't leave except via Uber?

And again, you can say "that's the risk when you take an Uber somewhere", and I can reply "but Uber isn't selling itself as a risky proposition".

brad

Tue, 2015-02-10 12:26

What I said was if you're poor, car ownership probably was never for you in the first place. By adding to the supply of pay-per-ride transportation, when before there was just taxis, Uber, Lyft and crew have done you a great service.

Once again, if demand is more than supply, then somebody who was depending on it is not going to get a ride (at least from the service.) That's the hard fact. The only question is, who is the somebody? I fail to see the big attraction of it being luck that decides this. I mean luck is "fair" in some sense but not a very good selector otherwise. But raising the prices here has the special ability to increase the supply, so fewer people are let down. Is it so important that it be allocated by random luck that you would want to forgo having fewer people let down? I just can't see that.

Uber does sell itself as a risky proposition -- I mean they don't promote that but it's how they work. You can't book an Uber to the airport, you just have to hope you will get one when the time comes. In fact, this holiday, I called for an Uber to get to the airport, it did not show and I had to pay $160 in parking. I didn't like it, but this is the way their service works, it is not guaranteed to be there. People who imagine otherwise are fooling themselves.

DensityDuck

Mon, 2015-03-30 08:48

"What I said was if you’re poor, car ownership probably was never for you in the first place."

Murray Rothbard would be so proud of you.

"By adding to the supply of pay-per-ride transportation, when before there was just taxis, Uber, Lyft and crew have done you a great service."

Um. If the surge pricing is in effect then they can't afford it, and that means it might as well not exist.

Which is the whole point of this discussion.

"In fact, this holiday, I called for an Uber to get to the airport, it did not show and I had to pay $160 in parking."

heheh, you should write more ad copy for them. "Try Uber! It might be expensive, but it also might not show up at all!" "Uber! We have unreliable service, but we make up for it by charging extra during terrorist attacks!"

And you're crying about how expensive parking was, but you knew up front that it was going to be $160. It's not like the sign said "$2 a day" when you parked in the lot and then, when you got back, someone had crossed out the "$2" and written "$50".

brad

Mon, 2015-03-30 12:40

I did not know the price of airport parking. On the way there I was calling all the usual lots and they were full so I had to park in the airport's more expensive lot. It happens.

Money is going to get you more transportation options. We're far from changing that as a rule. And UberX in particular has opened up a new avenue of transportation for a lot of people who could not afford more expensive previous services. I fail to see a valid criticism in the fact that they don't do this as well at times of peak demand.

Bill P. Godfrey

Fri, 2015-01-30 02:28

The traditional approach to risk has been to buy insurance. I imagine Uber could even offer this in the form of a paying a little extra for a booking in advance and they would guarantee that a ride would be available at that price, paying the excess if necessary.

(Maybe they already do. I don't know.)

brad

Fri, 2015-01-30 10:46

Uber owns no cars, and does not sell rides in advance. The price goes up when there are no cars available because demand is outstripping supply.

Kragen Sitaker

Tue, 2015-02-03 21:50

Uber Cab doesn't need to own cars in order to sell rides in advance, and if they sold call options or futures on future rides, it would allow people to depend on Uber without exposing themselves to unpredictable pricing. It exposes Uber to the risk of unpredictable pricing, of course, and it puts them on the hook to make sure they don't sell more of those options or futures than they can fulfill. But that might be less costly to them than having their customers hate them and lobby against them in municipal government hearings.

(Setting up a market to allow random people to sell options or futures on Uber rides to each other would probably require them to get a lot more transparent about how the ultimate prices are set, and they'd need to accept CFTC regulation, but they wouldn't have to do that to sell those options or futures directly themselves, would they?)

brad

Tue, 2015-02-03 22:54

Uber could sell options, as long as it does not surpass its capacity, but it probably would not. They like to keep it simple and not let you book in advance, even though there are lots of people who want that for things like airport rides. (On the other hand, if you book an airport ride and miss it, you will be very upset if they promised it to you in advance. As I have been with limo companies and never used them again.)

But of course people are not going to buy in advance for an unexpected emergency event. They might buy them for a storm, but I still like the market as a better solution, if you can find a way to make people happy with it.

Dan E.

Fri, 2015-02-13 03:57

Willingness and ability to pay is only one proxy for need, and not an especially good one. Willingness to wait in line is another, and that's the one people are uses to for scarce vital resources in a crisis. If you spend hours in a traffic jam, or spend hours waiting in line at the gas station, it's not an outrage if there's a crisis type reason.

There seems to be an expectation that crisis situations should trigger non market oriented responses. This isn't entirely irrational since markets tend to be especially inefficient and inequitable during sudden shocks. This is why we have FEMA, shut down stock trading on major news, etc..

But I think there's just a huge component of habit here. Nobody complains (much) because flower delivery costs 2x more on Valentine's Day, but there is lots of complaint that Uber costs more on New Year's Eve. To some degree I suspect their strategy of bullheaded obstinacy may pay off as people reset their expectations.

brad

Fri, 2015-02-13 13:55

Actually, they have been softening -- but we also get people like the mayor of New York declaring the surge pricing illegal. I don't think NYE causes the same problem as unexpected events, because everybody expects it to be hard to get a ride on NYE.

I am not quite sure how you implement "standing in line" with Uber. If the queue is in the cloud, then it's just the luck of who was first to request a ride on their phone. You could (this is complex) declare places people have to physically go to stand in line (Cab stands, in effect.) Seems silly to me, though.

This might be a good choice if supply was fixed. But I believe Uber that the supply is not fixed. That texting drivers and saying "Hey, earn 3x your regular rate" probably does bring in a bunch of new drivers who were off-shift, or farther away. And so a public good is met.

Densityduck

Mon, 2015-06-29 13:57

http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/17/how-uber-surge-pricing-really-works/

Relevant to this discussion. Analysis suggests that surge pricing increases the number of cars in the area of the surge, but decreases the numbers elsewhere; the increased number of cars is a result of active drivers chasing the surge prices rather than inactive drivers going active to take advantage of them.

brad

Thu, 2015-07-02 00:55

The more I have learned about their surge interface, the more it appears that it is not designed well to meet the goal of bringing more drivers to the road. Most simply, I would have thought that it did things like alert drivers who are offline but near an area with a text message or other notification, but it does not do this. Only drivers looking at the uber app heat map learn about surges, and so you get what the article describes.

DensityDuck

Thu, 2015-07-02 16:42

I mean, nobody expects that Uber drivers won't (or shouldn't) respond to price signals. It's just that Uber's claim was "higher prices mean more Uber drivers overall and that's why surge pricing is OK", but that isn't what actually happens.

Lex Spoon

Mon, 2015-07-20 16:43

Then tell Uber (and similar) that NYC will match all fees paid by riders for the next 24 hours. Riders would see the same price as usual, but drivers would see the surge price.

Everyone would benefit except for NYC's bank account balance, but I can hardly think of a better way for a government to spend its money.

Danny Myers

Thu, 2015-07-30 20:46

Invest based on how many laws company violated. Uber violated all known laws and regulations that ALL industry participants follow. Not even a hand slap, and a $45 BILLION dollar valuation. Here is an idea, stop paying taxes because you have some app call it "tax-surging" - there... a BILLION dollar start-up idea.

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