Uber's Surge Pricing

A terrorist held people hostage in Sydney, Australia a few days ago. In response to this emergency, Uber jacked up the fare price for its services. This caused a backlash because people don't like to have fare prices jacked up in an emergency. Then a number of journalists decided to explain why this is legit and awesome.

The arguments that unfold when this happens are wrong. Economics 101 lectures from journalists are generally bad, but it's even worse in the Uber surge pricing case because they are mixed with even weaker efforts at normative economic theory.

Olivia Nuzzi had one such article at The Daily Beast yesterday that is worth diving into because it epitomizes some of the worst arguments in the genre. Nuzzi's argument moves in a variety of directions, so I will address the various points in order.

Immorality Is OK

Nuzzi starts:

The fact that Uber allowed surge pricing during a hostage crisis may lead you to believe that the company doesn't care about you, and you would be correct. But Uber does not have a responsibility to care about you. Uber is not a government entity, and it is not beholden to the general carless public during an unwelcome drizzle of rain or even a time of great distress.

This procedural argument is not particularly moving. Grouping a particular legal power structure (which is what a corporation is) into a category and then saying that category has no responsibility to act morally is ridiculous on its face.
 
Suppose Uber created a sexist marketing campaign promising to match riders with "hot chicks" and asking "Who said women don’t know how to drive?" Would we say this is basically alright because, as a matter of arbitrary categories, Uber and the human beings in control of it have no responsibility to avoid behaving in a misogynist manner? I pose this as a hypothetical, but this actually happened, and people said it was bad.
 
Let's take it one step further and suppose that Uber put loud speakers on the top of all the cars that blared racial slurs one after the other. Would this not be a blameworthy action deserving of public rebuke? Would Nuzzi say that, because Uber falls into a particular legal category, it has no responsibility to behave morally in these situations?
 
Supply And Demand
 
Nuzzi continues:
 

The premise of the program is simple supply-and-demand: when demand for cars increases and supply decreases, Uber's algorithm inflates the fee for rides accordingly, which the company claims encourages more drivers to work, which puts more cars on the road when people are requesting them most. 

I am continually surprised by how often journalists just repeat this line without ever asking whether it's true. I've never seen any evidence showing that this actually works in unpredictable emergency situations, and there are good reasons to believe that it wouldn't.
 
In a situation where surges happen at predictable times, e.g. during rush hour or on weekends, drivers are able to schedule their "shifts" to take advantage of those times. But this is not true in an emergency situation that is, by its very nature, totally unpredictable. We have no idea whether and to what extent drivers who don't plan to be on the road at a particular time monitor the app to for surge opportunities and hustle out to capture them. It's plausible that they don't do it much at all.
 
You may wonder why Uber would therefore choose to surge in emergency situations. Partly this could be driven by algorithms that can't tell the difference. But it's also the case that, even if surge pricing doesn't jack supply (as Uber's reassurances claim), it still maximizes profit in a demand shock. In an emergency situation where demand shoots up but supply can't adequately respond, Uber's profit-maximizing move is to jack prices so that it allocates its low supply of rides to the highest bidders.
 

This is the most problematic part of surge pricing that always goes unnoticed. In an equal society, jacking prices when demand outstrips supply causes those who need/want the rides the most to get them. In an unequal society, jacking prices when demand outstrips supply causes those who have the most money to get the ride. Despite the taunts of irrationality you read from journalists, it is actually totally "rational" for someone on the bottom end of an unequal economic distribution to prefer keeping the prices low, thereby allocating the rides by lottery, rather than allowing them to be jacked up, thereby allocating the rides by wealth.

Gouging

Nuzzi continues:

But Uber's surges are not price gouging, as some have erroneously claimed. Uber––which is actually not the only method of transportation on Earth, despite what it may seem like––warns passengers about the surge before it allows them to order a car, and if the surge is over two times the normal rate, the app forces users to type it in, just to make sure they really understand what they are getting themselves into. 

This paragraph is just completely confused. Price gouging is not the thing where you jack up the price without the other party knowing about it. That's called fraud. The fact that the consumer is aware their prices are being jacked due to emergency-induced demand shocks does not mean it isn't gouging.
 
Who Is Owed What?
 
After relaying a hilarious Louis CK bit about how people complain when they pay money for internet services that end up not working, Nuzzi finishes:
 

How does the world owe you a private car, priced as you deem acceptable, that didn't exist five years ago? 

I find this sentiment the most interesting of the bunch because it actually tracks the intuitions of those who are complaining. Why is Uber owed more money because of a random emergency? What about a deadly emergency happening explains why Uber's coffers should fill with more money? They didn't do anything for that money. They didn't cause the emergency (which would have been even worse). It just fell in their lap, totally undeserved and totally unmerited. Believing that this is unfair is not a bad intuition to have (clearly Nuzzi has a similar intuition with regard to people not deserving/meriting use of a new product) and it reflects very common notions of fairness.
 
But if you want to get really in your face about how nobody is owed anything, then of course this should be applied to Uber as well. How does the world owe Uber anything? If it wants to behave badly, blast it right out of existence for all I care.
 
Fashionable flippancy should go both ways, if it's going to go at all.

 

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