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Uber’s surge pricing is good for you, Uber study says

September 18, 2015, 12:58 AM UTC
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The Uber Technologies Inc. logo is displayed on the window of a vehicle after dropping off a passenger at Ronald Reagan National Airport (DCA) in Washington, D.C., U.S., on Wednesday, Nov. 26, 2014. Uber Technologies Inc. investors are betting the five-year-old car-booking app is more valuable than Twitter Inc. and Hertz Global Holdings Inc. Photographer: Andrew Harrer/Bloomberg via Getty Images
Photograph by Andrew Harrer — Bloomberg via Getty Images

Ride-hailing company Uber sparked outrage when it hiked fares around New York City during Hurricane Sandy three years ago. Uber’s defense? “Surge” pricing, as the company calls it, was a necessary incentive to get drivers on the road to ferry passengers around.

Since those days, the public has grudgingly accepted Uber’s surge pricing along with that of its rival, Lyft. But many passengers still think the practice of doubling and tripling fares during peak hours is greedy. Taxis, after all, don’t raise prices during rush hour.

But one of the real reasons for Uber’s surge pricing lies in how the company defines its service.

“Our goal at Uber is to ensure you can push a button and get a ride within minutes — even on the busiest nights of the year,” Uber head of economic research Jonathan Hall and Uber data scientist Cory Kendrick wrote in a blog post about a study examining the company’s surge pricing on Thursday.

The message is clear: Uber is about getting you a ride from your phone, and quickly.

The study, conducted in partnership with Chris Nosko, a marketing professor, at the University of Chicago’s Booth School of Business, tries to make the case that the company’s price hikes are great for passengers, overall. As a test case, they looked at the availability of drivers after a pop concert at New York City’s Madison Square Garden in March and during New York’s most recent New Year’s Eve.

During the concert, surge pricing kicked in. But not for New Year’s Eve.

The conclusion?

Unsurprisingly, for the concert, higher fares succeeded in getting more drivers on the road to pick up passengers within a reasonable amount of time. Afterward, the high demand for rides abated.

However, on New Year’s Eve, Uber’s surge pricing technology broke down for 26 minutes during a period of high demand. Because drivers had no incentive to hop in their cars instead of celebrating, the situation spiraled out of control. The rate of ride completion—how Uber measures market equilibrium and its own success—dramatically fell during those 26 minutes, according to the report. At most, 25% of the rides were completed during that period.

Estimated arrival time, the measure for how long a passenger has to wait to be picked up, also significantly increased, something Kalanick told Wired in 2013 that causes customers to lose confidence in the service and abandon it. At its peak, wait time was eight minutes during the period without surge pricing.

With that said, there are certainly arguments against the practice. A 1986 study by Nobel Prize-winning economist Daniel Kahneman found that 80% of Americans polled thought that price gouging — the economic term for surge pricing — is unfair and unjust. More than 30 states currently have anti-price gouging laws, which of course, also have their opponents.

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