Why surge pricing works

From a diary of a part time Uber and Lyft driver:

Monday nights are usually slow, and since I had already made more than usual, I called it a night at 5:36 p.m. and signed off the apps.

Some people, some of the time, are driven by the income effect. I want to make $x. Some people, some of the time, are driven by the substitution effect. My leisure is worth $y to me, if people are paying my $y+ then I’ll work.

Actually, near everyone is near always driven by a blend of the two effects. As it happens, empirical studies show that cab drivers are more motivated by that income effect.

So, when traffic for rides for hire is high what do we do about it? Try to kick people over to the $y+ part by raising the pay on offer.

There is significant economic insight behind this part of the gig economy. And substantial increases in utility as a result – it’s a lot easier to get a ride in the rain….

19 comments on “Why surge pricing works

  1. I thought that the conclusion was the other way round – I remember a story that at some point in the past Ken Livingstone as Mayor of London (or possibly back in GLA days) thought there were too few taxis around at night, so he increased the amount they could charge.

    But as taxi drivers were motivated by the income effect, what happened was that night-driving taxis hit their income target earlier in the evening and went home, leading to FEWER taxis available late at night – the opposite outcome to that which was desired.

  2. It’s amazing how hard it is to get people to understand this. I’ve had someone trying to interest me in participating in a money making endeavour. There are things I could do to earn money rather than sit on my arse in the sun with a cool drink at hand. But I value doing bugger all at x per diem & these would provide < x. So I don't do them. And I'm definitely not going to be interested in something pays x ÷10 The point being, every individual has a different value for x

  3. The politicians are bound and determine to shut surge pricing down. Yes, it will be easier to get a taxi late at night in the pouring rain if you are willing to pay more, but those that aren’t are left in the rain complaining about it. The drivers charging more and the people willing to pay more are vilified, and the politicians will act to ensure that this ends because why should the more affluent not suffer equally? While the law of supply and demand is quite logical and understandable, it is also widely hated.

  4. Isn’t the result of surge pricing a smoothing of the supply / demand curve?

    In a big city, as long as there is a sufficiently large number of market participants (drivers / clients) then its as pure an example of free markets as you’re going to get in the west.

  5. TD,

    ” but those that aren’t are left in the rain complaining about it”

    You’re missing the point. Previously, EVERYONE was left in the rain complaining about it.

  6. You’re missing my point. Those that are left in the rain complaining about it want everyone to be left in the rain and hate that some buy their way out. They will act politically on that feeling. If there are enough of them there will be “stay wet and miserable for equality” legislation passed.

    You see this in all sorts of areas. In California we’ve been restricting building for so long in the face of a growing population that there is a “housing crises”. Yet the state just past a restrictive statewide rent control law that will surely discourage building of new rental housing or the maintenance of existing units. The law of supply and demand is hated by a lot of people who think economics is just people behaving badly or who want the politicians to exempt them from its effects.

    Don’t get me wrong. Surge pricing makes sense. But don’t think that it won’t be cracked down upon.

  7. Lots of money to be made driving for Uber and Lyft with your free car, petrol, insurance and smart phone.

    Wait . . . what? . . . Oh. Never mind.

    One man’s surge pricing is another man’s price gouging.

    The occasional hurricane here used to bring out enterprising people who would react to plywood being sold out by driving inland, like to Atlanta, filling up their pickup truck with plywood. They’d come back an set up in the corner of a big store parking lot and sell it for like $25 a sheet, many times the normal price. They’d make good money, and people would have plywood to cover their windows.

    Whiners convinced the state (South Carolina, in my case, and there are others) to ban price gouging. So now, when a hurricane comes, vastly more damage occurs.

    A gas station near me was dinged for price gouging a few years ago when there was an outage on the Colonial Pipeline.* They trucked in gas and priced it to reflect their increased cost. Government didn’t care and fined them big. When there is a problem leading to higher gas prices, the station now just closes. People who can’t get gas can just fvck off and be happy they aren’t being ‘gouged.’

    *A massive strategic blunder in the U.S. is the southeast’s dependence on the Colonial Pipeline. The government has prevented the building of new refineries, so the Gulf Coast refineries expanded to meet the demand. Virtually ALL the SE gasoline comes thru the pipeline. Any outage causes massive problems, affecting many millions of people. A major terrorist attack on the pipeline could cause catastrophic problems for the U.S. It could dislocate tens of millions of people and disrupt a significant part of the economy. Like a 20% drop in GDP.

    https://www.eia.gov/todayinenergy/detail.php?id=28032

  8. Gamecock,

    I was saved by price gouging a couple of winters ago. Heavy snow in Bristol. Most of the buses didn’t run. The trains just gave up, even after saying one was coming in 30 minutes. Just “oh, fuck off passengers”. It was only a slow service from Filton, I’m certain they could have run it.

    Instead, some bloke in an Uber charged us £40 to go to Temple Meads. 3 of us piled in a car and got gouged. And what was my alternative? Pay far more for a hotel or freeze.

    I’m certain that if it was regular price, he wouldn’t have been picking up fares.

  9. They’ll bring private hire fares within the hackney price cap – and then people will complain then the capped peak fares are more than the discount off-peak fares.
    How *DARE* they increase fares when it’s busy!!!!
    They’re *NOT*, they’re *DECREASING* fares when it’s quiet, you moron.

  10. It’s one of the big issues for Uber and Lyft being allowed locally as there’s anti-price gouging rules for taxis that stop them charging variable rates.
    Interestingly the transit authority is campaigning to be allowed to charge ‘peak’ rates during main commuting times. They claim it will reduce overcrowding and smooth out demand and be ‘greener’ where as it’s really just an attempt at a price grab for a dependent set of customers. Not surprisingly most of the lefties and millennials in the office believe them and don’t see it for what it really is.

  11. Gamecock,

    The occasional hurricane here used to bring out enterprising people who would react to plywood being sold out by driving inland, like to Atlanta, filling up their pickup truck with plywood. They’d come back an set up in the corner of a big store parking lot and sell it for like $25 a sheet, many times the normal price.

    OT, but first thing I thought on reading this was “dang! Wood’s cheap over there”. Last sheet of 1/4in ply I bought was about £16!

  12. “This is the beauty of the job: If you don’t want to work, you simply don’t work.”

    Not for much longer buddy.

  13. And the anecdotes are about the good times. He made 41 bucks in two hours. Great! Now back to your regularly scheduled program. One event doesn’t make a job.

  14. There is also evidence of drivers trying to manipulate the system, collectively all signing off around peak time to trigger the surge pricing algo and then signing back in. The punters however are getting wise to this and refusing surge pricing and the algo resets. Markets eh?

  15. When I worked in Taxi Licensing, the drivers that made the most money were the ones that treated it as a full-time job and worked fixed hours. The ones that worked “oh, I’ve made XXX, I’ll call it a day” ended up spending half their days sat at home not earning.

  16. The ones that worked “oh, I’ve made XXX, I’ll call it a day” ended up spending half their days sat at home not earning.

    Maybe that’s what they wanted. When I was self-employed, there was enough work that I could have worked all the hours and made loadsamoney. I preferred to up my daily rate, so I got less work, made less money, but had more leisure. It’s a personal choice and different people will make different choices. Which is all good.

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