​Uber defends surge pricing with NYC case study

18 Sep 2015 | Author: | No comments yet »

New Study Blasts Critics Of Uber’s Surge Pricing With ‘Economics 101’.

The controversial practice of surge pricing is one of the key reasons an Uber is typically only minutes away in a major city, according to a new economic study released by the company’s research team.We’ve talked about Uber’s surge pricing—the mechanism by which the company increases fares for riders when demand in an area spikes—plenty of times here before.The hike in the rates of Uber and other cabs as well, at the time of holiday season or large scale emergencies is something which has time and again irked customers. Written by Uber researchers Jonathan Hall and Cory Kendrick with the aid of University of Chicago economics professor Chris Nosko, the report shines new light on what Uber would look like without surge pricing.

We’ve discussed how it’s not price gouging, how it doesn’t take unfair advantage of drunk people, and how people are still bound to hate it no matter how many times you explain all of that (especially on New Year’s Eve). The authors argue their findings show that “without surge pricing, Uber is not really Uber — you can’t push a button and get a ride in minutes.” When demand for Uber rides soars far beyond the number of cars available, surge pricing kicks into action, charging customers substantially more. Lately, though, outrage-fueled thinkpieces on surge pricing have been pleasantly absent from the news, which you might take as a sign that people are finally coming around to the business model, or at least aware enough of it to stop being shocked by it. The study took into account the 26 minutes glitch in surge pricing technology of Uber caused during the New year’s eve and other times where it was working properly. Customers are given fair warning about the price hike. “You’ll automatically see a ‘surge’ icon next to the products (uberX, UberBLACK, etc.) that are surging.

The study, conducted in partnership with Chris Nosko, a marketing professor, at the University of Chicago’s Booth School of Business, tries to make the case that the company’s price hikes are great for passengers, overall. The study shows, in intricate detail, that surge pricing allows for Uber to function, as suppliers (drivers) are enticed by the potential for higher fares, and demanders (riders) will decide if they really want to pay higher prices right that minute. However when surge pricing could not be implemented due to a glitch, the company saw sharp increase in ride requests of which only 25% could be completed. I’ll spare you most of the details, but basically they conclude that when the Ariana Grade concert ended, surge pricing did what it was supposed to—increased the supply of drivers filling requests in the area, while keeping the amount of people actually requesting rides far below the much more substantial number who had opened the app. In Uber’s Ariana Grande example, it only looked at usage in a “restricted geospatial bounding box” containing Madison Square Garden, which is 5 avenues long and 15 streets wide.

And then they give us a pretty graph! (Click to enlarge.) As you can see, when surge kicks in, all the things that are supposed to happen per economic theory do in fact happen. Surge pricing has two effects: people who can wait for a ride often decide to wait until the price falls; and drivers who are nearby go to that neighborhood to get the higher fares.

The rate of ride completion—how Uber measures market equilibrium and its own success—dramatically fell during those 26 minutes, according to the report. That’s probably because those drivers are being promised more money for making pickups in the surge area, while more price-sensitive riders are being discouraged from hailing cars by the inflated fares. In 2014, Uber commissioned a study that showed, as Slate put it, that “Driving for Uber is great,” although that didn’t turn out to be quite so accurate. Uber says this is good for customers because it “allocate[s] rides to those that value them most.” That’s true, if you simply equate value with willingness to pay more.

Estimated arrival time, the measure for how long a passenger has to wait to be picked up, also significantly increased, something Kalanick told Wired in 2013 that causes customers to lose confidence in the service and abandon it. A 1986 study by Nobel Prize-winning economist Daniel Kahneman found that 80% of Americans polled thought that price gouging — the economic term for surge pricing — is unfair and unjust. Also known as hundreds of customers requesting rides all at once, ETAs climbing above six minutes, and Uber’s completion rate plummeting to well below 25 percent. Regardless of demand conditions, the surge algorithm filters demand and encourages supply such that a ride is almost always fewer than 5 minutes away.” To this I will say again, it sort of depends on whose consistency and reliability considerations you’re accounting for.

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