The Economics of Uber

Thesis: Uber must find a solution to extreme fare surges or else it will alienate its consumer base and become irrelevant.

Why does Uber use Surge Pricing?

Uber hikes up prices during times of high demand for multiple reasons. Firstly, they value supply of available rides over reasonable prices. Uber is aware that unreasonable fare surges (for example 6x baseline fare) turn consumers away and they are actually fine with that. They would rather consumers see that cars are available and choose not to order than to see that “no cars are currently available.” Secondly, surging creates the illusion that Uber is more popular than perhaps it is. Potential consumers who need a ride see that fares are currently higher than normal and whatever reason they wanted a ride in the first place is amplified. If skies are grey and a consumer thinks it might rain, seeing a fare surge lets them know that others think the same or it probably is already raining elsewhere in town. Thirdly, Uber believes surge pricing makes driving for Uber more appealing, thus getting more drivers on the road. In reality, Uber’s surge pricing model is unclear and their website does not even include an explanation on how they price their rides during times of increased demand ( Therefore, this is not an automatic draw for those considering driving for Uber.

Uber’s Surge Pricing is detrimental to both consumers and the company for various reasons. First, fare surges alienate reasonable consumers considering taking Uber over a normal cab. It takes Uber from being “everyone’s private driver” to only the wealthy’s private driver. Surge pricing is bad for Uber’s drivers as it leads to drivers riding around with empty cars. This is frustrating especially in times drivers know are popular to take rides.

A particularly outrageous instance of fair surging occurred during the Sydney hostage crisis in December. Fares reportedly surged to four times normal, at a $100 minimum. Dan Kedmey with Time magazine called this price gouging “Uber trying to capitalize on a potentially deadly emergency.” While Uber attempted to remedy the situation soon after offering free rides and refunds to those in vicinity of the attack, it still calls into question the algorithm Uber uses to hike fares. The algorithm senses when an area is experiencing high demand and low relative supply.

I don’t think any other company (Lyft etc) can sufficiently compete with Uber at this time, particularly in major metro areas and even more narrowly, in college towns such as Ann Arbor. So now is the time for Uber to not be so concerned with having “zeroes” (what Uber calls riders who open the app to see that no cars are currently available) and care more about the quality of the consumer’s experience and the satisfaction of current drivers.

How can Uber solve this problem?

Getting more drivers on the road would help Uber to not alienate as many consumers as it currently does and allow existing drivers to fill their cars more frequently when consumers are not scared off by fare surges.

2 thoughts on “The Economics of Uber

  1. Curtis Simeral

    I agree, the Uber surge pricing definitely needs some work. How would Uber entice more drivers to be on the road? It seems to me that surge pricing is the carrot that gets drivers on the road during busy times.

  2. Hojoon Kim

    I also agree with your idea that Uber should find a solution to fare surges. Uber surge pricing doesn’t really mean anything in big cities like NYC or Chicago since people can simply use yellow caps or other taxies. But surge pricing becomes a totally different story for cities like Ann Arbor, where it is hard to get a taxi during busy times.

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