The real effect of surge pricing

While Uber is coming under a lot of fire (including from me) on its surge pricing, Wired’s latest piece on Uber’s situation clarified a point that is worth highlighting.

Surge pricing, according to Uber, is intended to stimulate supply and curb demand to ensure the two match. Otherwise, the logic goes, would-be riders are left stranded without a car. Last month, during the height of the backlash against Uber over fares reported at seven times the usual during a New York snowstorm, Kalanick told WIRED that the bad publicity his company faced over surge pricing would pale compared to the impact of Uber not being able to offer a ride at all.

(Emphasis mine.)

This is what Uber and CEO Travis Kalanick are doing with surge pricing: they’re getting the masses to back off. Anyone who’s encountered a surge pricing screen on Uber in the past few months has done so while trying to reserve a car that’s only a few minutes away, as usual. That car is available because of surge pricing—specifically, because higher prices get fewer people to grab at finite inventory, maintaining a decent supply.

Of course, Kalanick can’t say that out loud, so he talks at length about bringing more cars on the road. Yet that’s only part of the story, and he’s been challenged on whether surge pricing really aids supply. In truth, what surge pricing really accomplishes is throttling demand.

And this makes sense: if an Uber user tried to call for a car in bad weather, and the nearest vehicle was 27 minutes away rather than 6, or not available at all, what would the response be? Customers would give up on the service for lack of reliability, and return to hailing cabs and calling car services, which are equally imperfect but entrenched in society. Uber is not, at least not yet. To the company, “Uber doesn’t work” is a worse fate than “Uber is sometimes too expensive.” So premium fares continue.

Uber has decided that supply is the most important link in its chain, and is using surge pricing to maintain it. Which, while not the most satisfying thing to Uber users, is a rather logical approach.

Update: this wonderfully in-depth look at Uber’s economic and business decisions sheds additional light on the subject.

The bottom line is that the only real alternative to dynamic pricing is a ton of customers staring at screens that read “No Cars Available.” This is the fact that is least appreciated by Uber’s critics.