This article is taken from an exclusive WIRED series, '41 Lessons from Uber's Success', featuring Tim Harford, Rachel Botsman, Nir Eyal, Clayton M Christensen, Josh Elman, Carlo Ratti and Richard Branson. You can find the other articles here.
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Here's how it works in the textbooks: when you raise the price of something, people want to buy less. That's the demand curve. Sellers want to sell more; that's the supply curve. There's a price at which demand and supply are the same. It's called a market.
Now, here's how it works in reality. It's New Year's Eve. Everyone wants to party. Nobody wants to be designated driver, or walk home in icy rain, or wait three hours for a taxi. Enter Uber, which will supply you with a prompt ride home for an astronomical price. Yet nobody is weeping tears of gratitude. "You're at their mercy because you don't want to wait longer for a cab," whined one unhappy passenger to The Houston Chronicle, after paying $247.50 (£160) for a 21km trip. Put another way, if you wait longer for a cab, you are not at their mercy at all. Uber's defence of all this is right out of the textbook: when lots of people want a ride, higher prices will bring drivers out in force, while encouraging passengers to choose cheaper options. Surge pricing is the only way to guarantee that you can get a ride whenever you want one.
But Uber is discovering that this defence isn't persuasive. Legislators in New York state have been debating a ban on surge pricing. Mainstream media and social media are full of complaints. None of this is a surprise to behavioural economists. A study by Jack Knetsch, Richard Thaler and Nobel laureate Daniel Kahneman way back in 1986 showed that people found surge pricing infuriating. This was true even when the market logic was obvious: for instance, the price of snow shovels going up after a snowstorm.
Businesses prefer not to frustrate their customers, so we often see empty shelves in emergencies. That might appear worse: at least with a high price, you have the option to buy. But an empty shelf doesn't feel like a calculated insult. It will be interesting to see if Uber bends under pressure and changes its policy. Many businesses do. Some tickets for rock concerts and Wimbledon are sold well below their true market value to avoid annoying the fans. That is why ticket touts exist. Even Apple felt obliged to offer compensation after trying surge pricing in 2007 -- the first iPhone was sold at $599 (£390) for two months, then cut to $399 (£260). Steve Jobs apologised. If he couldn't get away with a surge price, can anyone?
This article was originally published by WIRED UK
