This mis-characterizes the Economist's wonder at price mechanisms - as though this one characteristic in a vacuum should be a shining example of the "invisible hand" (subtext mine).
The key market assumption that is missing that would make this a wholly positive pricing activity, is that the marginally increased demand also comes with a marginally increased supply at a marginally higher cost, which it doesn't in these cases. The supply market does not expand in order to cover more customers in most cases, with everyone paying a slight penalty for the transaction/logistical cost, all it does is take a saturated supply market and price out the lower tier.
So if Uber was able to dispatch MORE drivers for a slightly higher cost at surge times (arguably easier with Uber than with traditional taxi companies), that would actually be closer to the Pareto efficiency that economists like. Perhaps I am wrong but it doesn't look like that is what happens in the case of Uber.
Why do you think Uber doesn't dispatch more drivers? As far as I know, one of the reasons for the surge pricing is to get more Uber drivers on the street, increasing the supply.
That may be the intention, but where's the evidence that it actually has that effect? Do they publish stats of number of drivers on shift vs pricing? I work for a similar business and I've seen evidence that supply is not all that elastic.
One of the stated reasons. We've yet to see any evidence that this effect actually occurs and is significant.
This is the same company that tried to eliminate its competition by ordering cars and canceling them at the last moment. I like their product enough, but their business practice track record suggests that they are not on the up and up.
Particularly in NYC where surge isn't just long events like New Year's - surge kicks in during half hour rainstorms as well. I highly doubt there's any significant supply change in that kind of time frame - in which case Uber is simply price gouging without any of the claimed positive supply effect.
> Particularly in NYC where surge isn't just long events like New Year's - surge kicks in during half hour rainstorms as well.
Surge pricing also encourages uber drivers (who decide their own hours) that are about to end their shift to end a bit later to take advantage of the surge.
Sure, all of this is logical and works in a thought-experimenty way. I'd like to see some data that backs this up though.
Market reality and what looks great on paper are often two very separate things - we in startups should know this better than anyone else.
How many extra cars get on the road during these short surge events? Is it worth charging everyone 2X if it brings an extra 1% of supply? 5%?
One thing you get used to after dealing with startups for a while is to listen to what they're not saying as well as what they're saying. Uber, along with all other "sharing economy" startups, like to trumpet their social-good side (see: AirBnb and the "helping poor New Yorkers pay rent" narrative). The fact that they've released nothing even remotely resembling data regarding the supply-boosting effects of surge pricing is suspicious. My suspicion is that the effect is not substantial unless during extended surge events (say, New Year's), certainly not substantial enough to placate people looking at 2X, even 3X fares.
Surge pricing also prevents an existing supply from eroding. When there was flooding in NY, the taxi shortage wasn't just caused by more people needing taxis, it was also caused by existing taxi drivers staying home.
Second: I agree. Uber should try to recruit more drivers before a predicted surge. They could, say, run ads on local TV.
The key market assumption that is missing that would make this a wholly positive pricing activity, is that the marginally increased demand also comes with a marginally increased supply at a marginally higher cost, which it doesn't in these cases. The supply market does not expand in order to cover more customers in most cases, with everyone paying a slight penalty for the transaction/logistical cost, all it does is take a saturated supply market and price out the lower tier.
So if Uber was able to dispatch MORE drivers for a slightly higher cost at surge times (arguably easier with Uber than with traditional taxi companies), that would actually be closer to the Pareto efficiency that economists like. Perhaps I am wrong but it doesn't look like that is what happens in the case of Uber.