Wednesday, February 26, 2014

The Problem with Uber

Uber is a taxi company that uses an app to hail their cars. The app makes for added convenience, but it also makes tracking demand for Uber taxis much easier. When the demand is high, Uber enables "surge pricing" which raises the cost of a ride when demand rises. This has gotten a lot of press recently and a lot of people have cried foul. Sometimes, rides can be four times as expensive as a normal rate ride. Surge pricing is not just based on the time, but also on location. So while Valentine's Day in NYC is likely a high demand day for taxis all over the city, a concert that just let out would result in a surge in only one geographic location.

Uber defends itself by pointing out that companies such as airlines and hotels have used surge pricing for years -- yet no one is complaining about them. They have a point. Industry-wide surge pricing increases efficiency -- it results in the most buyers and sellers making exchanges. This would work great with taxis as well.

Uber's drivers are able to decide if they want to put in extra hours or not. These drivers make more money when surge pricing is in effect. Therefore they are more likely to stay out on the road giving rides to people who need rides. Because more drivers will stay on the road to handle the demand, the difference between supply and demand will converge and the price gets lower. This really is the beauty of the market. If on one side of town a football game has just ended, the drivers from the sleepy side of town will move to the busy side to take advantage of the surge. So where football fans may have waited hours for a ride, they now have to wait less because more drivers have arrived.

So what's the problem? Surge pricing sounds great for everyone! And it would be. If there were ubers and not Uber.

For supply and demand in markets to work most efficiently, there need to be so many buyers and so many sellers that a single one of them alone cannot change price. This is the definition of a perfectly competitive market. The problem with Uber is that there aren't many different surge price-based taxi services competing for riders -- there is only one.

In Miami, there was serious debate in the county commission over allowing Uber in. I'm for it. But I think the best idea would be to postdate any legislation authorizing surge pricing-based services so that other companies have a time to set up and take advantage of the new market. Free market theory would assure us that they certainly would. If Uber is allowed a monopoly on surge pricing, however, there is no free market argument for it.

EDIT: Another article on Uber's surge pricing. At what point does surge pricing become gouging? "Uber Surge Pricing: There's a Mobile App for Price Gouging"


  1. Thanks, Curtis for pointing me to your essay. I read it, plus some articles, before writing my own essay on Uber. ( Perhaps you might write and post another essay--one taking account of mine and your first one?

  2. The Hurricane Sandy surge pricing was news to me. That's certainly beyond the pale as far as I'm concerned. Not knowing before hand how much a ride is going to cost (assuming it's a regular route the customer takes and is aware of how much it would usually cost) is also problematic.

    Since Uber won't be coming to Miami anytime soon, I'm afraid I won't have any first hand experience with it. If I write a follow up article I'll certainly cite yours as well.