On Surge Pricing

Lots of controversy about the “surge-pricing” from car-rental outfit Uber, both during a mid-December snowstorm and on New Year’s Eve. Fares increased up to eight times the normal, so that people were getting charged hundreds of dollars for short rides. The company’s response was that surge pricing is here to stay.

The argument is standard supply-and-demand, economics 101. If demand goes up, increase the price to increase supply. Or, as the company says:

With surge pricing, Uber rates increase to get more cars on the road and ensure reliability during the busiest times. When enough cars are on the road, prices go back down to normal levels.

But there are two things that I haven’t seen elsewhere (correct me if I’m wrong); not even on Matthew Yglesias’s post at Salon, and he is a magnificent observer of this and all other things.

Thing One: I really don’t care if you engage in “surge pricing” on New Year’s Eve, at rush hour, or at any other time when traffic is predictably busy. Knock yourself out, it’s absolutely fine by me. But surge pricing because of severe weather is something different, because at times of emergency we expect people to pull together: we expect people to check on their neighbours (for free!), to help people who are stuck (without charging!) and to generally be community-minded about things. Emphasizing monetary incentives at such a time undermines (or “crowds out”) community motives: if my neighbour and I help push your car out of a snowbank without payment then we’re just doing the right thing, but if my neighbour is being paid and I’m doing it for free, then I’m just being a mug. Surge pricing for reasons of severe weather is a bad idea. You may get a few more cabs on the road, but you make the emergency worse.

Thing Two: Customers were complaining that they didn’t know about the extra pricing until after they had taken their ride. Uber explained that they must have known: there was a perfectly clear screen notifying them about surge pricing, and they tapped the screen to agree to it. Now I used to do online documentation, and I’ve spent my fair share of time frustrated at the stupidity of users who cannot navigate my crystal-clear and elegant design (“Look: the button at the top there. It’s obvious”). But in the end anyone involved in user experience has to acknowledge that the user is right. What’s obvious to a designer or a trained user is not at all obvious to a casual user.

So if you design an app with the express purpose of making it easy to use without even thinking, and if a customer uses it fifty times and gets the same result each time, then they are not going to be paying attention the 51st time, especially after a few drinks. If you then add one extra screen in the middle of the ordering sequence that’s going to cost users an extra $300, then it’s up to you to test it till the cows come home to make sure that people know what they are agreeing to. Arguing that users should have been more careful is a really bad excuse. We should all read license agreements too, but none of us do. We just click, click, click until we get to the thing we want. Read? Of course I don’t read! And who’s ever heard of a $300 button in a mobile app? Sorry Uber: if you charge people an extra $300 for using your app too casually then it’s your own fault.

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  1. Do regular taxis use surge pricing? See, this is the problem I have with uber: it simply isn’t properly regulated.

    • Lots of places vary bus fares during the day, charging more at rush hour and less at off-peak times. Don’t know about taxis though.

      • Harald Korneliussen

        Taxis charge more on weekends and nights, that could be seen as a form of surge pricing. Yet it’s not regulation that stops taxi companies from getting this extreme, it’s plain common sense (and competition).

        Never mind decency, if Uber think they can hide $300+ charges and fleece people during a snowstorm and stay popular, they’re delusional.

  2. following the general principle outlined in this post, would it be correct for shops to raise bottled water prices in west virgina after the chemical spill?

  3. Are you *sure* that surge pricing makes an emergency worse? I’d expect a substantial effect among potential drivers in emergencies that you could describe as ‘you couldn’t pay me enough to drive now’. Would you be willing to change your mind, even a little, if empirical evidence indicated that surge pricing didn’t make emergencies worse?

    I’d also expect one-off experiments with surge pricing during emergencies to be pretty uniformly terrible. But I’d expect it to be a pretty undisputed boon if there wasn’t such strong norms against it – then lots of people would prepare to take advantage of surges during emergencies, and because people could rationally expect to be able to take advantage *without being vilified*, the actual surge in pricing would be much more moderate.

    Besides, people expecting to be able to take a cab or a car in a severe snowstorm probably should also expect to pay a lot!

    • I see the issue as where we draw the border between market incentives and other incentives to provide socially useful functions. The debate reminds me of the old one between Kenneth Arrow and Richard Titmuss about the relative merits of blood donations and payment for blood. So, to be as honest as I can be, no I would not change my mind if empirical evidence showed that in one city or another that surge pricing didn’t make things worse – I’d see it as evidence of how far that city has allowed market incentives to already crowd out other civic motivations.

      On the same topic, you use the word “rationally”, and I am always leery of the word. Descriptively it gets used in a broad sense and also in the narrow sense of responding to market incentives, and of course it has a normative flavour to it as well (who can be in favour of “irrational decision making”?) But there’s this slide into “responding to market incentives is rational, other forms of decision making are irrational” that happens, and that I rationally disapprove of. I’m not accusing you of it, but it’s a flag that gets raised for me.

      In the end, we’re talking about shaping community norms, as you describe. I’m in favour of shaping them to limit the range of market incentives, and it looks like you’re in favour of shaping them to expand market incentives. I don’t think either of us would be convinced by empirical evidence from individual cities.

      • Fair enough. But where do you draw the line that allows any market incentives? Tradition + whatever comes to mind?

        I meant ‘rationally’ in the sense of beliefs about the future more likely to be validated by future evidence, i.e. truth. But yeah; point taken; there’s a lot more than just financial incentives.

        I’m in favor of being able to get a cab or a car more often and more easily. It seems fair to pay more to do so if lots of other people want one at the same time. Then I can decide if it’s really worth it at the quoted price. Up until now, there hasn’t been a choice.

        Your point about the UX tho really is probably the key to the outrage. I’d be pretty pissed if I didn’t realize I was committing to a $300 ride.

    • Given the crazy expensive rents in the neighborhood he’s obliquely referencing, the quoted surge prices aren’t really *that* ridiculous.

  4. Small correction: Yglesias writes for Slate, not Salon.

  5. What seems striking to me about this argument are two things that undermine the argument (that is, the argument that price-gouging is OK in a free market because it will clear the market better).

    1. Uber is apparently a service that matches riders with drivers, that is, it does not actually employ drivers. And yet Uber controls the price. You would think if they were so interested in free-market pricing, drivers would be able to set their own prices and pick up what business they could. In other words, Uber is setting the price in exactly the same way that municipal taxi regulation sets prices.

    2. Even if you can justify price gouging, for example, bottled water in a situation where the water system is poisoned, this doesn’t really apply to Uber. Bottled water is going to be available on every street corner, from a thousand different sellers. Uber is one of a very few taxi-like companies. It’s as though the city water system were poisoned, and there was only one bottled water supplier. Are you really going to be OK with the monopoly bottled water supplier charging 8x normal price for bottled water?

    Basically, all the positive arguments for price gouging depend on competition, which is precisely what Uber doesn’t offer.

  6. Great post, and its horrible to see what seems like price gouging during severe weather. But you missed one thing – do you think that Uber drivers will be willing to work for the same pay during extreme weather? I doubt they would. Not raising prices would mean there’d actually be less drivers on the road. Unless of course Uber decided to pick up the tab and pay the drivers’ inflated amounts, and so giving away the rides for free.

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