The controversial practice of surge pricing is one of the key reasons an Uber is typically only minutes away in a major city, according to a new economic study released by the company’s research team.
Written by Uber researchers Jonathan Hall and Cory Kendrick with the aid of University of Chicago economics professor Chris Nosko, the report shines new light on what Uber would look like without surge pricing.
The authors argue their findings show that “without surge pricing, Uber is not really Uber — you can’t push a button and get a ride in minutes.”
When demand for Uber rides soars far beyond the number of cars available, surge pricing kicks into action, charging customers substantially more. The system ensures those who are less eager to get a ride can wait it out until surge pricing drops and those who are in a rush can pay a premium to be picked up first.
The price rise is also intended to incentivize more drivers onto the road in the hope they will make more money and alleviate the high demand. Customers are given fair warning about the price hike.
“You’ll automatically see a ‘surge’ icon next to the products (uberX, UberBLACK, etc.) that are surging. If you still want a ride, Uber shows the surge multiplier and then asks for your consent to that higher price,” the paper says.
The study compares when surge pricing failed to work in New York City on New Year’s Eve for 26 minutes and when it was turned on following a sold-out concert at Madison Square Garden. The two scenarios had dramatically different results.
After the concert, the number of people opening the Uber app rose four-fold. However, the number of people deciding to request a ride “only rose slightly.” All the ride requests were completed and estimated time of arrivals were “virtually unaffected.”
Despite the warnings, there have been numerous cases where customers were horrified by the extraordinary amounts they were charged when surge pricing was on. A woman named Gabby in California was charged $360 for a 20-minute Uber on the night of her 26th birthday. After asking for money on GoFund.Me and railing against the charge she raised $512 in just 12 hours.
On New Year’s Eve, during the time surge pricing was out of action there was little reason for more Uber drivers to hit the road in hope of making extra cash. As a result, just 25 percent of ride requests were completed. ETAs also soared. “Without surge pricing, rider and driver behavior did not adapt to the increased interest in getting a ride,” the study said. (Uber’s Surge Pricing Could Be Next In Line For De Blasio’s Latest Crackdown)
The authors conclude, arguing:
These two real-world scenarios illustrate a bit of Economics 101: supply and demand adjust in response to price changes. On Uber, this means a ride is more likely than not just a few minutes away, at the simple touch of a button.
A poll of academics in 2014 overwhelmingly agreed that using higher prices to allocate transport services is good for consumers. Eighty percent of the IGM Economic Experts Panel agreed that Uber raises consumer welfare.
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