Uber’s Surge Pricing — What’s it for?

Update:  I have a newer post with some updates on the thoughts here.

Today is apparently Uber day on Sandor at the Zoo.  First, the obligatory:

Disclaimer:  I work for Flywheel, an Uber competitor.  The opinions expressed here are my own, and are not endorsed by Flywheel.

Matthew Yglesias has an article (way, way, way better than the Valley Wag one), on this weekend’s Uber mega-surge-pricing, in which he suggests a few things:

What Uber ought to do is simply take 20 percent of the base fare and give all the surplus to the driver.

[…]

It should be to find a way to make 2x or 3x pricing attractive enough to drivers that the multiples basically never have to get higher than that.

Do read the whole thing.

My impression is that Yglesias is being a bit too ingenuous here.  Uber glosses their surge pricing as “this is a way to entice more drivers onto the road,” but I don’t think that’s a huge component of what it actually does for them.  Uber drivers typically work something in the general vicinity of full time, and Uber encourages that.  They just don’t have a huge pool of excess supply to tap into.  And at high demand times, they probably have a smaller pool of untapped drivers anyway — take New Year’s Eve, a time when you can absolutely guarantee that surge pricing will exceed x5 — it’s not like all of Uber’s drivers are hiding at home on the biggest cab day of the year.

And indeed, the idea that Uber drivers would somehow not be incented to drive with x3 surge pricing, or indeed even x2 or maybe x1.5 surge pricing is kind of ludicrous.  Of course that’s enough to drag them out onto the streets.  I seriously doubt that going from x3 to x6 surge pricing increases the supply pool by more than 5% at the very most.  Drivers are, I say from personal experience, extremely motivated by financial rewards, and sensitive to the difference that relatively small (but very obvious) changes make.

Rather, I think that surge pricing is simply a way to make Uber’s revenue work out.  Their baseline fares are pretty low — UberX cars are typically priced below cabs, baseline.  And they are at least trying to have a higher quality service than cabs provide.  That’s probably not sustainable.  I suspect that they don’t really make much gross profit on a pure baseline ride.  Rather, those are loss-leaders for the real business of selling surge-priced rides.  And they need to take their cut of the surge-priced rides in order to have a decent business.

A big caveat here is that Uber is a generously-funded tech start-up, so they on some level “don’t need to make money.”  They could sell each ride at a loss and make the difference up on volume for a considerable time, and perhaps if their market share increases enough, their investors won’t mind.  For an example of a business like that, check out Yglesias’ favorite, Amazon.

But my impression is that Uber isn’t going that route.  They’d prefer to make gross profits on taxi rides and throw the money made from those over into their ambition to become a logistics company.  I say this without inside information of any kind, so perhaps I’m just crazy, but that’s my impression from what they’ve publically said and done.

Anyhow, moving over to things I do actually know about:  Taxi fares.  The basic deal is that fares are set at a statutory level, which is very loosely an average of the market price at non-peak times and peak times, plus or minus a layer of incompetency or graft.  Demand for taxis varies widely throughout the day and week.  The number of people who want a taxi ride at 3pm on a Monday is probably less than 1/10th of the demand for taxis at 10pm on a Friday (or 2am on a Saturday, or whenever the local bar closing time is).  So since the fares don’t change, on some level people riding at non-peak times are subsidizing people riding at peak times.  That is, if rates were allowed to vary purely by unfettered market demand, I would expect to see the rates on Monday afternoon fall, and on Friday evening rise.

Which is more or less what Uber has done.  UberX rides are (mildly) cheaper than taxis Monday afternoon and (much) more expensive than taxis on Friday evenings.

All of that said, in the long run, I think it’s more productive to work on changing the supply situation.  Ride-sharing (in the sense of multiple unrelated passengers in one vehicle, not “ride-sharing” a la Lyft), integration with a public transit system, or getting vehicles and drivers who do not work full time as drivers onto the roads at high-demand times are all going to actually improve quality of service to passengers in a far more real way than either the statutory limitation of fares (as has traditionally been the case with taxis) or allowing fares to float up in an unbounded way (as Uber does).

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One thought on “Uber’s Surge Pricing — What’s it for?

  1. Pingback: Uber’s Surge Pricing Updated | Sandor at the Zoo

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