"surge pricing" entries
Should algorithmic pricing be the norm rather than the exception?
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Companies want a bigger share of the pie than their competitors, capital wants a bigger share than labor (and labor wants right back), countries want a bigger share than their rivals, but true wealth comes when we make a bigger pie for everyone. Well run markets are a proven way to do that.
Surge pricing is one of Uber’s most interesting labor innovations. Faced with the problem that they don’t have enough drivers in particular neighborhoods or at particular hours, they use market mechanisms to bring more drivers to those areas. If they need more drivers, they raise the price to consumers until enough drivers are incented by the possibility of higher earnings to fill the demand. Pricing is not set arbitrarily. It is driven algorithmically by pickup time — the goal is to have enough cars on the road that a passenger will get a car within 3–5 minutes. (Lyft’s Prime Time pricing is a similar system.) Uber keeps raising the price until the pickup time falls into the desired range.
This is clearly an imperfect system. In one case, surge pricing gouged customers during a crisis, and even in more prosaic situations like bad weather, the end of a sporting event, or a holiday evening, customers can see enormous price hikes. This uncertainty undercuts the fundamental promise of the app, of cheap, on-demand transportation. If you don’t know how much the ride will cost, can you rely on it?