
Uber’s Surcharges Demonstrate The Harsh Reality Of Dynamic Pricing - llambda
http://techcrunch.com/2012/01/01/ubers-new-years-eve-surcharges-demonstrate-the-harsh-reality-of-dynamic-pricing/
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dannyr
I don't think the issue is dynamic pricing but the app's UI. If it said "We'll
be charging you $50 for this trip" instead of "The rate will be 6.5x than
normal", users would not have taken the ride.

If the UI was right, the prices wouldn't have increased to more than $50 per
mile since demand would have likely decreased when the rate was about $20 per
mile.

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patio11
Uber dynamic pricing is positive for customers on New Year's Eve, in that it
ensures that if you are willing to pay money a cab is available for your use.
The market, it's magic.

~~~
ABrandt
I'm as big of a proponent of the magic that is supply and demand as anyone,
but uber's pricing was not exactly transparent. Last night was the first time
that I used the service. My first ride from my hotel in Chicago to my party
destination at 9pm was $15, awesome. Not only was I thrilled by the quality of
service, but I saw the message that fees would be higher that night and was
expecting a higher price tag. Fast forward four hours later and I was ready to
head back to the hotel. Same route, except this time the price was $54. Ouch.

The thing about market forces is that the buyer needs to be aware of the price
in order to make a rational decision that affects demand and alleviates the
strain on existing supply. Uber's app indicated I would be informed of the
additional charge prior to my ride, but that certainly never happened. In that
regard, I feel slighted and my feelings toward the company have been damaged
as a result.

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buro9
But this has always happened on NYE to minicab fares.

In London it's almost impossible to get a black cab on NYE. Black cabs have
their fares capped by regulation to something like 3x the regular fare. As
such, it's not lucrative to work that night for such a small difference when
they could be with their families.

Minicabs on the other hand are not capped, and are largely unregulated. Many
of them do work precisely because they can charge much higher rates, and they
do.

I once got a minicab on NYE that cost over £170 for a journey that should have
cost closer to £30. Caveat emptor.

What seems to be the case here isn't the market doing what the market does
best (regulate supply and demand and the cost thereof), but the naivety and
optimism of the consumer who hopes for cheap prices despite a severe spike in
demand and a shortage in the supply able to meet the demand.

The last time I needed a cab on NYE, I chose to walk the 11 miles home. I was
drunk, I was singing New Order most of the way. I actually really enjoyed the
walk and saved myself a lot of money in the process. I've lost my naivety
around cab fares on that night.

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tankenmate
All I can say to Londoners is; if you think this is bad, wait for the
Olympics.

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brian_cloutier
Are there any companies out there that try to predict these price hikes and
recommend the best time for you to do something?

As in, "I noticed that you're asking for a cab. If I were you, I wouldn't be
in a hurry, ask again in about half an hour and you'll get a much better
deal." "I see you're at a bar. You should probably hop into a cab sometime
soon, the prices are about to soar."

Bonus points if you can use multiple sources at once. "I know that you heard
hotels in Houston are going to be expensive next week so you rescheduled your
trip for next month, but if you go to these restaurants and use this deal for
car rentals, you'll end up saving money overall by going next week."

Obviously we're a few years away from those kind of recommendations, but is
anybody working on the core idea of predicting when it's best to use a given
service?

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beagle3
FareCast used to do that for flights; It's been bought by Miscrosoft and
integrated into bing travel somehow (although I can't tell which of the
answers you get there are "organic" and which are "farecast").

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teyc
The general public's problem with dynamic pricing for highly scarce goods and
captive market (stuck in the city) is that it makes for extremely bad
feelings.

The phrase "Price gouging" comes to mind. Even when dynamic pricing is
available, as long as people are stuck, they will feel resentment.

Another example is when there are hurricanes or floods. Shops could charge
"market pricing" for bottled water, but this only generates ill-will. What
shops do is to ration the supplies so that all those who need bottled water
get some.

The problem with cabs is you can't implement rationing. Furthermore, supply is
always going to be tight even if all the limousines came out in full force. It
is one of those once-a-year spike in demand.

The airline industry solves this problem by offering advance bookings. The
benefits of advance booking is that it incorporates some kind of price signal
so that people can decide whether they wish to travel or not. However, it will
take considerable cultural change for people to modify their discretionary
going-out based on fares alone.

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shasta
Steeply increasing the cost of water bottles or scarce items during a flood or
hurricane lessens stockpiling more effectively than rationing. Furthermore,
prohibiting "gouging" eliminates the incentive for shops to keep an oversupply
of water in case of a hurricane.

~~~
fleitz
Also, increased price after a natural disaster causes the supply side to
overcome obstacles such as downed trees, and dangerous hazards such as
structurally unsound bridges.

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kijin
I'm not sure if it's a good idea to motivate bottled-water companies to send
their trucks over _structurally unsound bridges_ just because people will pay
$10 per bottle on the other side of the bridge.

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nostromo
You might think differently if you didn't have access to clean drinking water.

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teyc
Delivering water under extremely hazardous condition is an act of heroism. One
doing it should not cheapen it by trying to extract maximum rent, especially
from people who might have just lost everything.

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stevewilhelm
I can predict what will happen next New Year Eve. Riders will hedge against
Uber's unpredictable price inflation by demanding the ability to lock in a
lower price several days or hours in advance. This "feature" is available now,
it's called a limousine service.

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ShabbyDoo
Let's take it a step further. Uber could provide a futures market for car
service. The same economic incentives which drive cattle producers to lock-in
the prices at which they will sell their cattle at the same time as they lock-
in their feed prices exist for car service. Thinking about staying at the
swanky hotel that's located a few miles from the party? Buy a forward contract
on car service at the same time you book the room.

The issue I see is that, without standardization of "product", it would be
hard to create an active marketplace. To a driver, taking someone away from
the city to the suburbs isn't as valuable as a route which leads to another
customer's point of departure. This, of course, implies that the drivers would
also be participating in the futures market. If they noticed, before
considering taking NYE off to be with their families, that they could earn
$200/hour, they might reconsider.

Furthermore, would customers be willing to lock-in service at a particular
time? What if the party is still going strong at your appointed time? You
could sell your service slot to someone else, but would you be willing to put
your contract up for sale while sipping a martini with your significant other?
Is there a market design which provides sufficient certainty and price/demand
visibility in a way where transactional costs don't destroy the value
proposition?

Perhaps the ubiquity of pocket "trading terminals" will usher in a new era of
dynamic pricing which will require the design of new market models? Next up,
concert tickets.

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shalmanese
Demand and supply meet at equilibrium when all players in the market are
rational and have perfect information. In Uber's case, their poor UI meant
that people did not have perfect information and there was a market mismatch.

What should have happened is that many people would have realized that paying
$50 to drive a mile was absurd and walked, resulting in a more reasonable 2 -
3x surcharge rather than an insane 6x surcharge.

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adamjernst
Knowing the economics behind it, I'm all for dynamic pricing even though it
does _feel_ like a ripoff to me personally.

I'd be very interested, though, to know how much of the increase (~6x normal
according to a screenshot on their site) is passed along to the driver.

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whereareyou
Uber takes the same cut as they normally do.

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baddox
The same _proportional_ cut, or the same constant cut? I'm unfamiliar with how
their revenue sharing with drivers works.

But, either way, I'm fine with this practice. The only possible controversy is
how well they inform their customers that it will happen, and how clear it is
on their app what the price will be. It would be bad for them to have a bunch
of customers expect to easily get an Uber on New Year's Eve, then be
disappointed by lack of availability or high prices.

I wonder why Uber does this? Is it mainly an incentive for their drivers (to
get as many on the road during a high-stress time)? Or is it because they
would rather have customers see high prices than to see zero availability?

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wmf
It also looks like they first "round up" to the $15 minimum, then multiply by
the dynamic factor.

