Surge Pricing: The Forgotten Principles

December 10, 2014

To be honest, since I first set foot in North America, I never appreciated the taxi industry. I always felt ripped off. While in some countries distance traveled is an important part of the equation to determine the cost, here it wasn’t considered at all. The price kept going up every number of seconds regardless the taxi is moving or not. Then once the trip is over, the cab driver will give you ‘the look’ if you don’t tip as if they have provided a special service other than stepping on the gas or brakes (tipping is another corrupt etiquette in North America which I have pages to write about).

Turns out I wasn’t the only unhappy one, and there were even more problems! In bigger cities like New York, they say it is really hard to get a taxi in busy times like Christmas or Halloween although I’ve never experienced that personally. This is due to the fact that the taxi industry is highly regulated and number of taxis available in any city hasn’t changed much over years. This artificial scarcity of taxis makes license plates valuable assets in the market, so it is good for nothing but to protect the owners of these plates. It was so obvious that this remained an industry to be disrupted.

Then came rideshare companies, and then some of these emerging companies like Lyft and Uber created their own taxi system that matched the supply and demand in the market. Everything was good until here, we were all happy customers! Then came the idea of surge pricing inspired by nothing but free market principles. Surge pricing is a pricing system that dynamically adjusts the price of your ride depending on the current demand in your area. This means if it is a time busier than usual, you might end up paying 2-3 times more for a taxi ride. Most of this higher pay goes to encourage more drivers to get on the road so people can have more rides. Uber was one of the first companies to employ this principle. It all sounded very reasonable to me especially considering people in a densely populated city like New York not being able to get cabs, until I have experienced it first hand.

This year, I was in New York City during Halloween. When I pulled my phone to get an Uber taxi, I was shocked: Surge pricing was active and it was 8 times the original price! So I ended up taking the subway to my hotel trying to believe this is reasonable considering it was Halloween night and everyone was on the streets.

Next morning, I picked up my phone again to get an Uber for my ride to the airport. Surge pricing was still active and it was 2.2 times the original price. So I blamed it on all the hungover people on the streets and called a Lyft taxi instead. Now, Lyft has surge pricing too, but it is always capped at 25% more than the original price. It was a much better option.

Shortly after I went outside to wait for my cab. What did I see? There was a stream of empty taxis driving through the street, I could have easily picked up 5 of them while I was waiting there. If Uber cars were operating on real free market principles, at that moment in time, I should have paid no more than price of a regular taxi because there was no shortage of taxis. Now, considering these services are about 20% cheaper than a regular taxi, Lyft’s pricing made some sense. But at 2.2x, Uber was wrong.

I kept questioning this and have realized one important truth: Uber must have been calculating demand based on its own market, not the entire taxi market in the area. So, the demand for Uber taxis during that time in my area could be high, but this doesn’t change the fact that there was a balanced demand in the taxi market overall. So I did the best I could do to punish Uber for violating the principles: I took a Lyft. In fact, I should have taken a regular taxi, but I already ordered a Lyft before I went outside and I didn’t want to pay the cancellation fee.

Don’t get me wrong: I have so much respect for companies like Uber that disrupt and bring real competition to long corrupt markets. I just don’t think it is fair when these companies forget their founding principles in the first place: To provide cost effective and innovative alternatives to customers. Uber should get real on its surge pricing policies by considering overall market demand. On the other hand, instead of whining and suing Uber at every chance, taxi companies should instead see this opportunity to attract more customers by bringing more innovation to their operations. Taxi industry has been working almost the same way since its inception, there was some disruption to be made. Even if this wouldn’t be Uber, Google’s self-driving cars would get the cab drivers complaining. So it’s time to stop crying and start adapting to the changes if you yourself cannot innovate. That’s the only way we can get real competition and be happy consumers.

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