Uber upholds capitalism, (possibly) learns downside of price gouging

http://www.latimes.com/business/hiltzik/la-fi-mh-uber-20131216,0,3779232.story

by ahmadss • 13 years ago

29 81 13 years ago

corin_2• 13 years ago

Uber's defense is that it needed to charge so much more to encourage its drivers to stay on the job

Maybe people would be more OK with it if Uber kept their commission flat, i.e. they get paid the same for each trip regardless of how much they are charging extra for the conditions. Not saying they have a duty to do this, just that from a PR point of view it would get rid of the assumption that they put prices up too much to increase their profits.

davidedicillo• 13 years ago

I found myself using other service more often when I see a surcharge. Especially for short rides, I prefer waiting and extra 5 minutes and spend half of the money.

apendleton• 13 years ago

I'm sure Uber would tell you that's exactly how it's supposed to work. The price increase drives some people to seek alternate modes of transport, which keeps the supply stable so it's still possible to get a ride if you're willing to pay the higher fare.

aetherson• 13 years ago

Wellllll.... Their general line is not "surge pricing reduces demand," but "surge pricing increases supply." Clearly, over here in reality, it does both, but they prefer understandably to emphasize the up-side.

The question is, how much does it increase supply? My guess is that it doesn't increase it all that much. Uber does not, to my understanding, have a huge pool of irregular drivers who only occasionally go out onto the road during high surge pricing. They encourage their drivers to work full time, and most surge pricing (ie, not anomalous events like snowstorms) are at times of predictable high demand, when you'd expect most of their drivers to be on the road anyway.

My guess is that surge pricing (especially surge pricing in excess of x2) is mainly a windfall for Uber and their drivers, and is less effective about increasing supply than their promotional material would like you to believe.

Disclaimer: I work at Flywheel, an Uber competitor. I am not un-biased.

wavefunction2• 13 years ago

$94 11 minute Uber rides...

This is why regulation of industry is not always an attempt to hold back the unbridled forces of "progress."

jowiar7• 13 years ago

The goal of regulation is to discourage traffic jams, fights, and the like on the side of the street caused by negotiation over price. With Uber you have the opportunity to see the price before pressing the button. Ideally, there are multiple Uber-like systems which will hold prices down, with a Kayak-like service to choose between them.

wavefunction2• 13 years ago

I thought it was to protect the consumer from things like... "price gouging."

I agree with your "ideal" situation being ideal, though I guess I expect that service pricing will be "protected business data."

johngalt2• 13 years ago

If one party is willing to buy and the other willing to sell, where is the issue? If you want regulated rates, wait for a cab. Intentionally using a premium service then demanding price controls makes you sound like the old man complaining that Starbucks coffee should cost a nickel.

atwebb• 13 years ago

When will Uber cease to be a start up or a premium service or some other classification of company that allows them to skirt the laws that their direct competitors have to abide by? A large part of the argument isn't whether or not the gouging is acceptable, it's that Uber/Lyft/new ride app is allowed to loophole itself into "current market rates".

sneak3• 13 years ago

Nice username + comment pairing.

jowiar7• 13 years ago

It's a supply and demand thing - there's a choice -- Some people get cabs at sub-market rate, and some stand on the corner for an hour trying to get a cab -- or -- Some people pay more for a cab, while others balk at the price and find an alternative method of transportation.

I've stood outside for an hour on a cold, snowy, windy New Year's eve/morn in Boston trying to get a cab... I'll take the price hike vs. the jockeying for sidewalk position, fights over who gets what cab, and other silliness. I think the drivers would too.

thenmar2• 13 years ago

There's a choice now, and it's arguable a fair choice. But if Uber puts heavily regulated cab companies out of business, the alternative disappears. That raises some issues in emergency situations like bad weather. Transportation is to some extent a necessity - would you be in favor of stores selling water for $100 a bottle before a hurricane? That might be the price that the market decides but the result of that is people suffering simply because they weren't lucky to be born in the right family.

holograham6• 13 years ago

you are missing the other half -- that high prices drive more market entrants. If the price of bottled Water is 100 dollars then more entrepreneurs will take the risk to transport bottled water to a hurricane prone area because of the profit incentive. This increase in market entrants would in turn drive down the costs to the point where the costs of transporting water to the area equals the ability of people to pay. If a business cannot profitably sell the water in the area then yes, humanitarian aid is probably needed short term (long term there probably needs to be analysis if the area is viable for humans to live in).

vdaniuk2• 13 years ago

Nice red herring you've got there. Why didn't you compare cabs to emergency healthcare services? That would make your argument even stronger. /s

guyzero2• 13 years ago

It's not fair now, it's random. Random is not fair. Giving one person out of 100 chemotherapy isn't fair, especially if that person doesn't actually have cancer. Cabs, especially in constrained conditions, are essentially assigned randomly. Which is only fair for a fairly narrow definition of the word.

bradleyjg• 13 years ago

At least in NY, there is no way in hell that Uber is going to put yellow cabs out of business. Not that yellow cabs are some kind of egalitarian paradise. They all congregate in the areas of Manhattan where the richest people live, work, and play. Good luck finding a yellow cab in e.g. East New York.

jowiar7• 13 years ago

But if Uber puts heavily regulated cab companies out of business, the alternative disappears.

Then we're into antitrust territory, which is a totally different can of worms.

Would you be in favor of stores selling water for $100 a bottle before a hurricane?

If this were to happen, it means that there was not enough water in the first place. What's the alternative? Allocate to whoever shows up in line first? Then people who don't want to risk waiting pays someone in the front of the line to buy them a bottle of non-subsidized water, and the price of water hits $100 anyway - it just goes to someone else. As an example of how this works, see ticket sales to high-demand events (Super Bowl, concerts, and the like).

As an example of one strategy that works, one of the most important aspects of US Food policy is that we subsidize production so that food produced far beyond what would otherwise be the market-clearing price. This means that we don't have food shortages in times of disaster. One transportation-equivalent would be building a decent public transit system capable of mass evacuation.

johngalt2• 13 years ago

Arguments like these always ignore any motivation of the person providing the products and services.

If water is selling for $100/bottle you'll find a large number of people driving trucks full of water towards a disaster zone. If you regulate the price of water to 50 cents a bottle, those same people will stay home. You can call risk/reward decisions immoral all day, but it won't change reality. You think cab drivers will work for the same crap pay during a disaster?

knowtheory4• 13 years ago

You have the means to do that.

What about people who do not have the means to do so? Should they be the ones stuck walking because you can afford to pay more?

jowiar7• 13 years ago

The drivers are the ones who get hosed in the current situation, being legally compelled to offer their services at sub-market rates.

You're a programmer. What about the people who do not have the means to hire you to write code for them. Should you be required to offer your services for $8/hour? Should the rate for programmers be fixed at $25/hour?

Economics is the study of the allocation of scarce resources. Our policy choices are a reflection of those decisions. I'm open to a debate on capitalism as a concept - I certainly think it has its pluses and minuses - I don't consider myself a laissez-faire capitalist by any stretch of the imagination. But at some point every decision is a decision that has consequences - we're allocating scarce resources, which means that we're balancing diverse interests in some way.

If you believe that "hiring a vehicle" means "depriving someone else of a cab that they are entitled to" and thus has a cost to society, another policy choice would be to tax cab transactions and then distributing the proceeds evenly across the population.

saosebastiao• 13 years ago

If you aren't willing to pay more during peak times, you have to deal with the scarcity. This is problematic for things like food, water, and shelter during emergencies...not so much for luxury car rides across town.

gaius• 13 years ago

Or holidays during school holidays, another classic example of people not understanding supply-and-demand (and the need to keep the infrastructure running when there is no demand).

DigitalJack• 13 years ago

Scarcity is interesting. It's the root problem that government is trying to manage. With perfect knowledge, a central authority could have goods or services brought to those most in need. This is very alluring to politicians as they naturally make themselves the central authority, and people have a natural bias to believe they are right and will make the right decisions.

Eventually you confront the problem of more people being in need than there are resources to satisfy. You can solve this by lottery or some qualification system or money. But someone somewhere will be left in the cold. This may be the poor or some schmuck who's birthday was in February.

Sadly most economies don't take the "most in need" concept a a founding principle. It's about trade, where each participant feels they are in a better situation than before the trade. Money is used as an abstraction representing utility/usefulness of an object or work done.

This is fine until you discover the person who has no money and apparently does not provide enough utility to get money (or enough money to live).

This is where charity can take action. Basically a trade happens where one's position is worse after the trade and the other's is improved.

Some believe this charity should be a private affair, some believe it should be compulsory.

tgrass3• 13 years ago

There's a great interview with Mike Munger on Econtalk about the price mechanism during an emergency: http://www.econtalk.org/archives/2012/11/munger_on_john.html

tgrass3• 13 years ago

As I understand it, Uber's prices are listed prior to contracting for a ride. Uber's market is clearly the middle to upper income brackets. If it's understood that the price is time and conditions-variant, I fail to see how their pricing method is unethical.

smackfu3• 13 years ago

They might benefit from being a bit more transparent with pricing. From a customer's point of view, the multiplier is just arbitrary ("it's busy, so we're charging seven times what we normally do"), and they have to trust Uber that it is being set fairly. If it gets excessively high, like it has in these recent cases, they start losing that trust in Uber, and move to a competitor.

tgrass3• 13 years ago

I agree, that the firm might benefit from transparency; but the article stresses the need for regulation in the interest of the consumer, not the firm.

This is how the price mechanism is supposed to work: it communicates inefficiencies over the long term.

sneak3• 13 years ago

It's not unethical at all, it's just that mid-to-upper-class smartphone users in big cities have a wicked sense of entitlement.

They approve a dialog that warns them of 7x pricing (not with a button, mind you - but by explicitly thumb-typing the string "7X" into a box!) and then they complain on twitter when their ride is $300 and call Uber crooks.

The amount of entitlement found among the smartphone generation is staggering.

jdminhbg2• 13 years ago

In my Uber/Lyft-less city we had a snowstorm last week and I needed to get to the airport. I spent 15 minutes letting my phone fruitlessly ring to various cab companies before giving up and digging my car out to drive and park for probably $90+ for the course of my trip.

It's a curious human psychological tic that people think this is a better situation for me than looking at my phone's Uber app and deciding whether $90 for this particular ride would be worth it or not. And not just thinking that the latter is better for me, but that I need to be sheltered by law from encountering the former situation.

williamcotton3• 13 years ago

The article is mainly about the shortcomings of pure unregulated capitalism, but thanks for your little story about yourself!

Which makes your comment incredibly ironic, you know, because the underlying message is that a system driven only by individual perspectives is fatally flawed.

Pinatubo• 13 years ago

Beside missing his point completely, your comment is needlessly rude.

peterjancelis• 13 years ago

It's not about the shortcomings of capitalism, it's about the shortcomings of nature.

Uber is not responsible for a lack of drivers in an emergency situation.

Uber can also not prevent competitors from entering the market, so the monopoly pricing fears make no sense.

gabemart• 13 years ago

Are auctions unethical?

metaphorm5• 13 years ago

depends on what is being auctioned

jtbigwoo2• 13 years ago

True. Are we talking about auctioning beanie babies or dialysis treatments? I expect that folks would be much more accepting of the former than the latter.

(To be clear, I'm not saying that Uber rides fall in the same category as dialysis treatments, just that folks are more sensitive to "unfair" pricing as the product or service gets more essential.)

bengarvey• 13 years ago

Experiments using the Ultimatum Game have shown that people hate feeling like they're being ripped off, no matter how much we think they should just act rationally and understand the circumstances.

A great book on this is Priceless by William Poundstone.

sailfast2• 13 years ago

This article asserts that if taxi cabs were run out of business by Uber then nothing would remain to keep Uber's prices in check. That is completely incorrect. There are a number of competing apps for rides (or they would be built quickly to compete) and cars could freely undercut Uber. I'd be the first to jump in and build an app that pulled each service's ride price to compare options.

If price gouging continued, lower priced alternatives would flourish. I'm struggling to see why this demand-driven pricing when provided BEFORE you get in the car and make your purchasing decision is a problem.

Without price gouging, would you even be able to get a ride in a snowstorm? Just because something is available in good conditions at a normal fee does not mean you can just stop planning your logistics and assume that service will be available all the time.

That said, what the market-based alternative does crowd-out is those without the resources to pay spiked fares that may have lucked into a cab in previous circumstances.

metaphorm5• 13 years ago

transportation is a basic infrastructural need. there is profound social harm done when demand from the wealthy forces prices to rise to the point where poor and middle class people cannot afford it.

tcpekin• 13 years ago

The fact that Uber may charge more during peak hours does not eliminate the fact that the poor and middle class from using buses and subways, basic government supplied transportation, both of which are abundant in Manhattan. I don't really understand, at this point, how Uber could possibly cause social harm with flex pricing. If Uber was the only option, sure, and maybe that is what you're arguing. But I doubt the poor rely on Uber for transportation, and there are still several other options.

jtbigwoo2• 13 years ago

> There are a number of competing apps for rides (or they would be built quickly to compete) and cars could freely undercut Uber.

That's one possiblity. Another is that network effects would allow Uber (or Lyft or whatever) to dominate local markets since drivers and riders would flock to the most popular. The barrier or new entrants is going to get pretty high if Uber can snap up enough drivers.

sailfast2• 13 years ago

True, but there is no shortage of drivers even if they start snapping them up. For $20 a mile, I'll get in my car and pick you up. Uber would have to corner the market for all drivers by paying them off which is... expensive, and extremely unstable.

If you required a CDL or other more involved permit to pick people up that might restrict supply but I don't anticipate demand outpacing supply of drivers if there is money to be made.

cypherpunks01• 13 years ago

"Let Uber put taxis out of business, as sometimes seems its intention, and there'd be no check on its "surge" pricing and no way at all for ordinary people to get around."

No way at all for ordinary people to get around? Is this a joke? As far as I'm aware, ordinary people take ordinary transportation, like, you know, subways, buses, bikes and such.

pessimizer2• 13 years ago

Are you trying to say that ordinary people don't take taxis?

vdaniuk2• 13 years ago

No, he doesn't. And it's pretty obvious what he means: that primary method of transportation for most people is public transport and price hikes during the scarcity periods will be a minor inconvenience as many other transportation means are available.

pmorici• 13 years ago

Sounds like a bunch of rich people complaining about having to pay the hired help extra to deal with undesirable work conditions to me.

FireBeyond2• 13 years ago

Right? It’s telling, in a very Stanford Prison Experiment way, how that works.

Take my girlfriend. She used to work as a nanny for a couple, two lawyers for the State. They were strictly middle-class, and paid the same to my GF as they would for daycare (my GF had taken care of their two children when in daycare, until the center closed). It was mutually beneficial, as my girlfriend’s own daughter was the same age as their kids and knew them.

Seattle and surrounds are not known for heavy snow, and don’t have the infrastructure to deal with it. I work with the Fire Dept. Was called in when a big dump ended in a State of Emergency being declared.

My girlfriend’s employers got a message from the State, not to come into work that day. That they could work from home, and were advised to stay off the roads, as they were particularly dangerous with over two foot of snow, re-freeze, and largely unplowed.

They called my girlfriend (who lived with me, about 5 miles away) and, seemingly oblivious to what was coming out of their mouths: “We will be working from home today, as it’s too dangerous to drive. So we’ll need you to come in an hour earlier, thanks."

sardonicbryan• 13 years ago

I think the analogy here to price gouging during an hurricane is quite a stretch here. I don't think many would agree with "surge pricing" on essentials or transportation during Hurricane Katrina where the alternative might be death or extreme property damage. I don't see how that applies to the vast majority of Uber surge pricing scenarios.

I have a friend who lives in Pac Heights and gets hit with surge pricing all the time, likely because few Ubers are willing to pick up customers there. He's switched to Flywheel, which works well and doesn't have surge pricing. Seems like everyone wins here. Meanwhile, I live in SOMA, rarely get hit with surge pricing, and pretty much exclusively use UberX/Uber.

robrenaud• 13 years ago

Uber tried to use surge pricing in the aftermath of Sandy in NYC, and was basically forced to pay the drivers the extra surge prices out of their own pockets due to the PR fiasco that ensued.

http://blog.uber.com/2012/11/01/hurricane-sandy-pricing-upda...

Of course, this was only the aftermath. I am very skeptical that for hire taxis are a good way of saving lives in an emergency.

I personally totally buy the economic argument for surge pricing. But they have a very PR problem of convincing people that it's useful and beneficial to everyone.

smackfu3• 13 years ago

The dilemma for Uber here is that a 6x or 7x multiplier completely changes the market for a service. It's an increase from $30 to $200. If it was just a 2x multiplier, people would be much more accepting, since it would move from pricey to really pricey.

sneak3• 13 years ago

It's not really Uber's dilemma. They warn people about the multiplier before accepting an order from them.

This is a simple case of buyers not wanting to take responsibility for their own actions.

smackfu3• 13 years ago

I agree that we are only hearing complaints from people who went ahead with the purchase, and then had buyer's remorse the next day.

Uber's bigger problem is all the people who got to the screen that said it was incredibly more expensive than usual, and walked away and started talking about what a rip-off Uber is and how it gouges people who are in need.

the_watcher• 13 years ago

Price-gouging serves a purpose: it ensures that the service in question is not unevenly distributed to the first customer there. In situations like transit this advantage isn't as obvious as in situations like a gas shortage. Are cabs in the Bay Area regulated in terms of max prices? I end up avoiding Uber in surge times because basically every other option is cheaper.

sharemywin• 13 years ago

The bigger problem is customers opinion of the company and service. Great you got my business when I was over a barrel but I'll probably use someone else the other 99 times. Amazon keeps its pricing low for a reason. cutting fees during emegencies is how you build customer loyalty.

kubiiii• 13 years ago

What is cool with price gouging is that it makes standard pricing appear like an innovation premium user would pay for.

Uber upholds capitalism, (possibly) learns downside of price gouging

Related Stories