Monday, December 15, 2014

Economics: "Uber's Sydney fiasco: the problem with surge pricing is everyone hates it"

Following up on this morning's "Uber Introduces Siege Pricing: Quadruples Rates During Australian Terror Evacuation".

If you should you still use the Uber, may I suggest a companion application?:
I've Got Your Disruptive App: How To Get Around Uber's Surge Pricing
And with a slightly less combative tone, Yglesias at Vox:
Taxi cabs often become scarce during bad weather or other scenarios that lead to a surge in demand. Uber has developed an economist-friendly solution to the problem — raise prices when demand spikes. But it's a solution that keeps getting the company into trouble, most recently when Uber Sydney tweeted that surge pricing would be in effect in the wake of the hostage crisis that unfolded over the past twelve hours.
The backlash was fast and furious and the company immediately backed down.

People hate variable pricing
The basic economic logic of raising prices when demand surges is hard to argue with. If you got a job offer at 2:00 PM, and then immediately got a second job offer at 2:05 PM you would negotiate with both potential employers (and your current boss) for the best overall job — not feel compelled to take the offer that happens to have come in first.

Cold hearted rationalists like me have often wondered why this logic is not more broadly applied in business life.

Why do concerts and sports events regularly sell out leaving thousands of fans out in the cold, rather than featuring prices high enough to roughly balance supply and demand? Why don't popular restaurants charge more for a 7:30 PM reservation on a Saturday night than for a 9:00 PM reservation on a Wednesday? Why does the hardware store run out of salt during snowstorms rather than hiking prices?

The endless cycle of backlashes provoked by Uber's efforts to apply variable pricing to a consumer good help us understand these puzzling economic questions — people really hate it and it hurts your brand. People would rather see inefficient allocations of scarce goods, lower overall supply, less total employment and job creation, and perennial shortages than let prices float up and down according to demand....
...MORE

Definitely related:
Big Storm For San Francisco Means Uber Jacks Prices to Highest Ever