Apps & Software

Uber Explains Why $35 a Mile Is the Right Price


Uber is the darling of the technology industry—unless it’s raining. That’s when it raises prices and becomes the whipping boy of the Twitterati. The latest round of outrage over the company’s surge pricing came over the weekend, when rates increased by a factor of seven in New York because of a snowstorm. At one point, Uber was asking riders for a rate of $35 a mile.

An article in Wired on Tuesday broke down the thinking behind surge pricing, as explained by Travis Kalanick, the company’s chief executive officer. It’s basically the first lecture from an Introduction to Economics class:

“To understand the economics of surge pricing from Uber’s point of view, think of drivers as supply and riders as demand. Especially in bad weather, demand goes up: Would-be passengers don’t want to be out in the snow and rain. Meanwhile, supply goes down: Drivers don’t want to be out in the snow and rain, either.

“In that scenario, higher prices are meant to accomplish two things. First, by offering drivers more money, it gives them more incentive to get out on the streets—at least in theory—thereby increasing supply. Second, higher fares price out some riders, and demand goes down. Calibrating supply, demand, and price to get the most people the most rides for the least money is the math problem that Kalanick says Uber is always trying to solve.”

Kalanick told Wired that higher prices facilitate more rides in situations of high demand. “We are not setting the price. The market is setting the price,” he says. “We have algorithms to determine what the market is.”

Whether or not this is outrageous isn’t a question of economics. It’s a question of values. The ethical discussion can get a bit Talmudic. For some things, like the price of publicly traded stocks, society has decided to strive for as close to a perfect market as possible. For others, market forces are interrupted in one way or another. Restaurants, concert venues, and movie theaters all accept less than full market value for their goods and services at times of high demand, because they think it’s good business. At other times, the government sees a social good in dulling market forces through regulation or subsidies.

Kalanick, on the other hand, is a free-market fundamentalist. This isn’t surprising: Rationality has long been the religion of Silicon Valley, and what’s more rational than having a computer constantly calibrating prices? But a free market is always defined by scarcity: Not everyone who wants something can have it. So even if Uber is facilitating more rides, building a system where there is what amounts to continuous bidding for services will aggravate inequality.

At the same time, the company is also engaged in ways to increase overall supply, like the clever financing for drivers of its UberX service, who get better loan terms on their private cars if they agree to drive for the service. That, the company says, will push prices down overall.

Uber’s approach is effectively the opposite of the existing car-service industry’s model, where prices are largely regulated. Then, when it rains or snows, people manage to get rides mostly by being lucky. Uber’s riders can trump luck by being wealthy. Which one is unfair?

Brustein is a writer for Businessweek.com in New York.

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