Question

Uber and Lyft have changed the way local taxi service operates. Using independent drivers and driver-owned vehicles, both companies serve as middlemen using digital technology to provide on-demand transportation services to consumers. Nevertheless, Uber and Lyft customers often complain about the practice of "surge" or "prime-time" pricing used by these companies during periods of peak demand. From a classical economics perspective, this form of dynamic pricing makes sense based on supply and demand relationships. Fare increases in periods of high demand-a shift in the demand curve to the right-in turn increase the supply of drivers available for passengers. From an ethical perspective, supporters of surge or prime-time pricing argue from a utilitarian view that this type of pricing increases the supply of drivers and more people get a ride. Critics of surge or prime-time pricing argue that this practice is flagrant price gouging by Uber and Lyft. Where do you stand on the economics versus ethics debate related to surge or prime-time pricing?

Answer 1

On the economics versus ethics debate related to prime-time pricing, I would support the classical economic perspective of dynamic pricing.

Prime time refers to the the point in time where demand for rides is higher than the number of drivers available on road. In such cases, the passengers opting for a taxi service have to pay an amount which is higher than the normal fare. The taxi operators charge an extra percentage on the base ride amount. Such a pricing strategy is known as 'surge' or 'prime time pricing'.

The most important point to understand on 'surge pricing' or 'dynamic pricing' is that it is based on the concept of sound economic theory. This means that the basic aim of app based services is to match demand of riders with the supply of taxis. Both these variables depend on external factors such as time of the day, location of pick up and traffic condition. Therefore if high demand for taxis would exist in one area, dynamic pricing would ensure an increase in supply to meet such a demand. In fact the increase in the fare also acts as a catalyst to motivate the drivers to go on road if for any reason they are off road. Uber and Lyft are true marketplace models as they do not own cars and also do not own drivers. In other words, the drivers are independent agents as either they are self employed or work for someone who own multiple cars and therefore are not bound by exclusivity. The majority of the fare charged goes to these independent drivers and a small proportion is retained by the service providing company. Hence surge pricing motivates the driver to accept the ride who otherwise is in a position to turn down the ride request.

The fare set by these apps is a pure depiction of how demand and supply works. To portray these apps as gouging the public is not to accept or understand how market works. In the absence of dynamic pricing the number of drivers as well as taxi service operators would be limited.

Surge pricing exists across numerous industries including airlines and hospitality and therefore it would be unfair to attack taxi operators only. Dynamic pricing is the ultimate solution when confronted with scarcity of supply. Thus, from the point of economics, it is a simple straightforward demand-supply model indicating that when there is a growth in demand and no surge pricing, there would be an increase in unfulfilled rides. Thus, the basic objective of surge pricing is to ensure that most customers get a ride.