The Economics of Uber’s Surge Pricing | Cato @ Liberty

31bits-uber-superJumboUber surge pricing is ordinary supply and demand economics at work. Given that Uber drivers drive at their own convenience it should not be a surprise that they are more likely to get on the road and meet demand at busy times if they can expect higher-than-average earnings. Many of Uber’s rideshare drivers use Uber on a part-time basis. Unsurprisingly, drivers who work more than one job or who have worked a full week may be reluctant to drive on weekends or late into the evening. Uber wants to keep the number of “zeroes” (a term used to describe Uber users who open the app and see no available cars) to a minimum.

But, when Uber brought surge prices down to 3x from 6x in east coast cities on New Years Eve in 2012 zeroes were “popping everywhere.”What is great about a pricing system like Uber’s surge pricing is that it allows users who want an Uber ride the most to have it. Prices are a great way of communicating customer preferences. When you buy a coffee for $3.00, you are telling the market that you value the coffee more than you value $3.00. Likewise, someone who is willing to spend $100 getting home in the early hours of a busy Saturday is signaling that he values the ride home more than he values $100. Many people would not be willing to pay the $100, opting to wait for the surge to end or to find alternative transport home.

via The Economics of Uber’s Surge Pricing | Cato @ Liberty.

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