Uber's Surge Pricing Model

April 22, 2014

Uber's "surge pricing" model has frustrated some consumers, says The Economist.

Uber, a taxi competitor that allows passengers to schedule a pickup from their smartphones, has revolutionized the transport of passengers. The ride can be less expensive than a taxi, and it is shaking up the anticompetitive cab industry by providing private cars available at the click of a button.

But Uber also has a "surge pricing" system, which kicks in when demand peaks.

  • A New Year's Eve cab ride can cost up to seven times the normal price.
  • Late night weekend rides are more expensive than daytime rides, because passengers are willing to pay more and fewer drivers want to work such late nights.

Such price discrimination has angered some passengers, but it is not a bad thing.

  • When a firm offers just a single price to all customers, sales may go up, but the firm loses out on the higher prices that some consumers may be willing to pay.
  • And because price spikes increase the take-home pay for Uber's drivers (drivers who use their own car receive 80 percent of the fare price), more drivers become willing to ferry passengers at peak hours.
  • According to Uber, the number of private cars available in San Francisco has shot up, with more drivers available during peak times, lured by the higher prices.

The models seems to be working, but it is not Uber's only option. The firm could also offer a fixed, monthly membership fee to its customers.

Source: "Pricing the Surge," The Economist, March 29, 2014.

 

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