Thursday, March 12, 2015

Price Controls: Uber and Surge Pricing in New York

Uber, the phone-app taxi service has had a rocky relationship with regulators over the last year. This is no surprise, since it provides a convenient, inexpensive alternative to the long-held taxi oligopolies found in major U.S. cities. The latest attempt to slow the growth of this new service comes in the form of anti-price-gouging legislation.

New York Assemblyman Felix Ortiz has proposed a ban on Uber's surge pricing. Mr. Ortiiz has two objections to Uber's surge pricing: 1) it's unfair for them to charge such high multiples of its normal prices and 2) Uber is not transparent in its pricing and doesn't tell the customer up front what price they'll have to pay for a given ride.

The problem with the Mr. Ortiz's first objection is simple. Uber is actually providing peak-load pricing in the taxi market. When demand for rides from Uber drivers increases, prices begin to increase. This is a perfectly rational response to an increase in demand and has the salutary effect of bringing more Uber drivers out to meet this increased demand.

If this situation occurs often enough, more people will begin to drive for Uber, increasing the supply of cars and pushing down prices. Peak load pricing is a perfectly rational way of "rationing" car rides (which are a scarce resource). Objection to this market response likely indicates either an ignorance of or an ideological opposition to the role of prices in a market economy.

The charge of a lack of transparency is even less defensible. Here is Uber's explanation of their surge pricing policy on their website:
Uber rates increase to ensure reliability when demand cannot be met by the number of drivers on the road.
Our goal is to be as reliable as possible in connecting you with a driver whenever you need one. At times of high demand, the number of drivers we can connect you with becomes limited. As a result, prices increase to encourage more drivers to become available.
We take notifying you of the current pricing seriously. To that end, you’ll see a notification screen in your app whenever there is surge pricing. You’ll have to accept those higher rates before we connect you to a driver.
Mr. Ortiz may be right that some people are unaware of the increased rates they will be charged, but it doesn't appear that Uber is intentionally keeping customers in the dark. In fact, Uber users likely have more information about the fare they'll pay during peak hours than they have about the price charged by a mechanic to fix their cars when broken.

Uber and other services like it are charting new territory in what has been called the "sharing economy." While it may seem like an example of the often-vilified "price gouging," surge pricing is really just a market mechanism for dealing with dramatic increases in demand over a short period of time.

The alternative to temporary price increases during peak hours is a dearth of cars. Top-down regulation that squashes Uber's ability to meet the demands of their customers will benefit established taxi services and could potentially cripple the pro-competitive innovation needed in this sector.

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