Question

Consider the ethics of surge pricing. Surge pricing involves the price of an Uber ride changing based on demand conditions in a given place at a given time.

a) Sketch a supply & demand model (riders are the buyers and drivers are the sellers) to highlight what might happen with and without surge pricing. Pay special attention to possible implications for efficiency and equity, do you, on balance, think that surge pricing is right?

b) Uber changed its rules to allow drivers in New York to set their own ‘surge prices,' (possibly prompted by a lawsuit accusing Uber of price-fixing by not allowing drivers to compete with one another on price). Does this change your thinking about whether or not surge pricing is right? Why or why not?

Answer 1

Question # a. During the surge pricing times which is usually the morning and evening hours when people commute to their workplace or from the workplace to their home, the demand becomes inelastic and people are not having any other option but to pay for the price which Uber is asking. Therefore with 1.2x or 2.0x increase in price not going to decrease the demand and this is the time when Uber takes the benefit of advantage and charges to surge pricing from customers. Now this surge price phenomenon is more of an ethical question rather than an operational question. Because there had been a flat price model for city taxis and was still profitable. Therefore it is seen as taking the advantage of situation customers are into. This surge pricing further reduces the efficiency as people need to spend more for the same distance of travel and time and also reduces the equity for the brand as customers feel dissatisfied due to the surge prices which they have to pay. Therefore, I don't think that surge pricing is the only way Uber can make a profit.

Question # b. Allowing drivers to set their price during the surge timing is more like an open market and unregulated liker when earlier Uber uses to control the prices. Now it is more like a fair deal and the open market where customers have the choice to select the driver who is offering the lowest price and due to competition among the drivers, the price will never rise to an unacceptable reason. I think this is still a better and fair practice than the earlier system of uber controlled surge pricing.