Question

Read the Economist article “A Fare Shake” and listen to the Freakonomics podcast “Why Uber Is an Economist’s Dream (Ep. 258)” assigned in this week’s resources. Then consider this question:

Does surge pricing successfully balance the demand and supply condition for Uber?

The expectation here is that you will examine how Uber’s surge price can bring equilibrium in this market by possibly affecting the demand and supply side of Uber ride. Apply your demand and supply knowledge and provide a sufficient analysis on the issue.

As you think through the above question and the goal of analyzing the issues by applying your knowledge of demand and supply, consider the following questions. Note: You should NOT post your answers to these questions in your discussion post. These are intended to spur your thinking about the surge pricing issue, so you can answer the question posed above:

• What is a surge (dynamic) pricing?
• Is surge pricing fair?
• Does surge pricing have the elegance with which the price moderate the market place? In other words, does surge pricing help balance demand and supply?
• How does it work?
• Which side of the market is being affected by surge pricing by Uber? Demand side or supply side?
• How does the practice of anticipating demand help Uber setting prices or surge pricing?
• How does the invention or existence of autonomous vehicles change or affect the idea of surge pricing?
• Should surge pricing be regulated by the local government?
• How does a good public transportation availability affect the practice of surge pricing by Uber? How does it affect the price sensitivity of Uber users?

Answer 1

In the short term, Uber's supply of rides is fixed. So, from a demand supply perspective, the supply is fixed in the short run. The demand of Uber rides, varies everyday. Usually its higher in the morning and evening, and lower at late night and afternoon. So we can say that the demand curve keeps moving right and left. Whenever there is an increase in demand, Uber's surge pricing kicks in. Uber keeps increasing prices till the supply meets demand. Again, if this were a supply demand graph, this means as demand increases while supply remains fixed, price would increase. An increased price would result in demand going down, until demand and supply are again in equilibrium.

So, purely from an eocnomic point of view, yes Uber's surge pricing should be capable to succesfully balance demand and supply. From a more practical point of view, there are many other variables and questions to consider. How exactly does Uber decide the surge price? What algorithm does it use? Is it a sudden jump in prices which doesnt actually move along the curve? Does Uber do it everyday in rush hours or is it actually done only when demand really moves? Is it ethical to do where there is insufficient public transport or an emergency (such as a natural calamity)?