Here's Why Uber Shouldn't Change Its Surge Pricing

Kevin Roose has a simple “solution” to Uber’s surge pricing “problem”: It should sell its services at a huge loss.

If Uber wants to create the same kind of fan base and avoid scaring away new customers with bad-weather sticker shock, it should cap the amount riders pay at two or three times the normal rates, while still paying drivers whatever rates it needs to get them to come out onto the roads. If a surge ride would normally cost $US200, with $US160 going to the driver, Uber should still pay that driver $US160, but keep the costs for riders contained to, say, $US80, and eat the other $US80.

This is idiotic, for two reasons.

(1) If Uber caps the price faced by riders, surge pricing won’t achieve its purpose, which is aligning demand with supply.

If the price of a given ride is capped at $US80 instead of rising to $US200, many more Uber customers will try to hail cars during snowstorms. But the number of drivers willing to provide the ride at a price of $US160 will be unchanged. That demand mismatch will lead to many customers being unable to get a car at all.

Roose positions his “loss-leader” strategy as one designed to generate goodwill among customers. But the shortages created by his proposed price control will alienate customers, leading them to conclude that Uber will often be unable to provide them a car at all during bad weather.

(2) What “problem” is there that needs fixing? Uber changes its prices to align with market demand. When it snows, a lot of people want door-to-door transportation and fewer people want to drive. That causes prices to rise a lot. Sometimes, people whine about this.

Is there any evidence that this whining reduces the number of people who use Uber under non-snow conditions? Or is this, like every change to Facebook’s Timeline or privacy policy, just something that people complain about on tech blogs and social media for a day or two, and then move on without changing their consumer habits? Why change your pricing structure in a way that causes you to lose a ton of money when you can just wait for all the tech bloggers to move on to the next shiny object?

If you get mad about Uber surge pricing, you’re basically getting mad about snow. Snow creates a town car shortage. Shortages can be addressed through price increases or through queueing. People who hate price increases have queueing options: They can try to hail a taxi or call a traditional car service. Caps on Uber prices don’t stop the shortage, they just switch Uber to a similar queueing solution. Why shouldn’t drivers and passengers who want to choose a non-queue arrangement be able to do so?

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