Markets and Morality

The public are wrong. A defence of ‘heartless’ surge-pricing


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“How could they be so heartless?” declared a newspaper on Facebook. “Shame on you” screamed the paper’s headline. No, this was not about the despicable bomb attack in Manhattan’s Chelsea neighbourhood on Saturday. It was rather a public shaming for the ride-sharing app Uber after customers complained of increased prices following the explosion.

With a pricing system which adjusts instantaneously, major incidents like this – where demand from customers rose steeply relative to the supply of rides – feeds through into higher fares on the app.

Since this is acute and noticeable, the public often perceives the practice as unethical or exploitative, rather than the normal operation of a market. “I paid half my arm to get home last night” moaned one Twitter user. We’ve all been there and, yes, paying more than you were expecting is annoying.

But the public are wrong to think that Uber’s “surge” is an example of greedy profiteering. In fact, so-called surge pricing actually helps in instances such as emergencies. This is important, as Uber will no doubt face increased pressure to curb the practice and may even now face government-imposed price caps. Its pricing mechanism is often criticised in Britain too.

The key point is that prices are merely messengers that tell us something about the underlying reality of aggregated decisions of customers and drivers. In this instance, the price of journeys in the Chelsea area jumped because so many more people wanted to use Uber relative to the number of cars on the road following the attack.

This price rise, far from being an unalloyed bad thing, actually has two major benefits in times like this. First, it deters those who might have wanted to use Uber but do not actually need to (and so are sensitive to price changes) from taking a journey.

If you were merely hoping to hop in briefly to go grab some supplies from a nearby store, you’d probably wait until tomorrow or use other transport. People who actually found themselves in danger or most panicked, on the other hand, would be less likely to be influenced by the price – and so more likely to get a ride.

More importantly, it signals to drivers that it is valuable to be on the road. It’s an incentive not just for more drivers to “clock on” at that time, but for others already on the road to move towards Chelsea from areas where demand and prices are lower. Even for drivers who do not react on the night, the surge pricing provides information that may make them more responsive in times of future attacks.

Attempting to curb a market reaction through capping surge pricing amounts to shooting the price messenger. Worse, as my colleague Kristian Niemietz has said, it’s like shooting the messenger, having first forced him or her to tell a lie. Capping prices would imply cars were less scarce relative to demand – meaning more people taking inessential journeys and fewer drivers being incentivised to head to Chelsea where they are needed. The result would be an exacerbation of the cause of surge in the first place – a greater gap between the supply and customer demand arising because alternatives such as taxis with regulated fares were not available to meet demand.

Eventually, given the negative Twitter reaction to its prices, Uber did end up buckling under the pressure and suspending surge. At that stage, it probably perceived the reputational impact from the social media storm to be more damaging to its long-term profitability than standing by its pricing. But those who will suffer if it bows to public pressure, or if politicians legislate, will be those who need the vehicles most in emergencies.

From demands to rent controls, through to whinging about holidays being more expensive out of school term time, people frequently blame prices themselves for the underlying realities they convey. Both politicians and businesses worried about their reputation need to be careful how far they go along with the moaners.

 

This article first appeared in City AM.


4 thoughts on “The public are wrong. A defence of ‘heartless’ surge-pricing”

  1. Posted 22/09/2016 at 08:00 | Permalink

    “People’s who actually found themselves in danger or most panicked, on the other hand, would be less likely to be influenced by the price – and so more likely to get a ride.”

    Surely this defeats your own arguement. This particular practice and in this particular incident resulted in those needing help having to pay more for it. It also meant that those poorer people in the same situation were discriminated against because of their economic situation. The reality is that Uber in using this system prioritises affluence at busier times and thus emphasises profit over people.

    Sure, everyone is allowed to make money but this article seems a weak excuse for profiteering to me.

  2. Posted 22/09/2016 at 20:11 | Permalink

    Steven M – did you read the article? You don’t seem to have grasped the point that movements in price have the effect of matching demand with supply – otherwise we get shortage or surplus.

  3. Posted 25/09/2016 at 10:11 | Permalink

    Steven M

    ‘Surely this defeats your own arguement. This particular practice and in this particular incident resulted in those needing help having to pay more for it.’

    As opposed to not getting a ride at all?

  4. Posted 26/09/2016 at 14:36 | Permalink

    I think a third major benefit can be identified. High prices encourage consumers to cooperate with each other to share costs; thus more people get rides even without additional supply of cars.

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