Last week, Uber announced that it was capping surge pricing during emergencies, following mounting public pressure. CNET reported the following related to the story:
In addition to riders complaining about running up bills totaling hundreds of dollars on New Year's Eve, people criticized Uber for initiating surge pricing during Hurricane Sandy.
Attorney General Eric T. Schneiderman said Uber will now limit surge pricing during incidents the government defines as "abnormal disruptions of the market." Typically, these are emergencies and natural disasters, according to a press release from Schneiderman's office. Uber is expected to extend this policy nationally, the office said.
"This policy intends to strike the careful balance between the goal of transportation availability with community expectations of affordability during disasters," Uber CEO Travis Kalanick said in the release.
Uber clarified that surge pricing will remain in effect for holidays and during rain storms, but that during widespread emergencies surge prices will be capped at 2.5 times the normal price (during emergencies, prices formerly went as high as 4.5 times the normal). The decision, however, is a mistake for both Uber drivers and customers.
It is obvious that the decision will hurt Uber drivers. During times when demand is high and supply is low, such as during an emergency like Hurricane Sandy, a free market will produce a price that is higher than the normal price, when demand is lower and supply is more plentiful. In other words, drivers would be able to earn more money by ferrying customers around following emergencies if surge pricing was not capped. By capping the multiplier at 2.5, the government has unethically forced a private company to redistribute the surplus of trade from the drivers to the complaining customers.
While Uber did voluntarily agree to cap “surge” pricing, it only did so only because the government threatened to regulate (i.e. meddle). Still, Uber may have made a shrewd business decision, even though they share in the revenue which Uber drivers rake in. Uber most likely hopes that by agreeing to cap surge pricing, they can avoid the grasping hands of regulators (for now) and the taxi cab lobby who want to destroy their competitive advantage under the guise of protecting the public from the non-existent threat their business poses. Unfortunately, drivers are undoubtedly getting the short end of the stick.
The less obvious fact is that customers are losing out too. The CNET article mentions consumer complaints over large bills during New Year’s Eve and following Hurricane Sandy; the comments are indicative of the primitive morality which instructs everyone that any price hike during a time of increased “need” is morally wrong. When trying to argue that surge pricing is actually better during times of high demand, the standard response from critics is that “only the rich will be able to get Ubers.” That of course is rubbish.
In a free market, resources should be allocated most efficiently by distributing them to the people who are willing to pay the most for them. If two people value the same car ride at $10 and $20, the person who is willing to pay $20 for the ride should receive the ride. The driver and customer both receive a greater benefit than if the $10 customer rode. By capping surge pricing, the efficiency of the market no longer operates after a certain point. If the same two customers both want that one cab during an emergency, there is in essence a lottery to determine who will actually be picked up, with just a 50% chance that the customer who values the ride most will be picked up.
The free market however will best provide for the $10 customer as well. Most critics of surge pricing are incensed if only the $20 customer receives a ride – the rich, it seems, get their way, while the poor are left out to dry. But that is not so. If the emergency drives the Uber price multiplier high enough, more drivers will undertake the efforts needed to get back on the road and drive more people, as they are enticed by the profits available. As more drivers return to the roads, supply increases and drives prices down, until the $10 and $20 passenger can both be served. With surge pricing capped during emergencies, incentives are not properly aligned for as many drivers to get back on the road, and only the winner of the Uber lottery will get an affordable ride. Uber’s CEO said he wanted to balance driver availability with affordability, but he has failed on both fronts by caving into the Attorney General’s demands.
Thus, the threat of government intrusion forced Uber to adopt a change to its business model that hurts Uber, its drivers, and customers. When will free market ideas, the true protectors of consumers, have their day in the sun?
* Thomas Warns is a J.D. Candidate in the Class of 2015 at New York University, and the Editor-in-Chief for the N.Y.U. Journal of Law & Liberty.