Uber's surge pricing seems to offend our sense of egalitarianism, but it's because of this feature that the service is constantly available for those who need it.
On the morning of New Year's Eve, the ridesharing company Uber sent its customers an email warning of increased prices particularly between 12:30am and 4am the next day, the time that revellers were likely to want to go home at the same time.
Nevertheless, on January 1, there was an inevitable spate of outraged press stories where customers complained about the extremely high prices charged by Uber during those peak hours. In some cities, Uber prices were nearly 10 times the normal price. One person paid $720 for a ride from Sydney to Blacktown.
This can't have been a surprise. The price is set by an algorithm. As well as the email that morning, Uber notified riders of the surge prices and required them to manually accept the increase before they confirmed the ride request. The Uber smartphone application also allows riders to estimate fares in advance.
One suspects that more than a few of these unhappy riders were "tired and emotional", in that charming media euphemism.
The case for what Uber calls "surge pricing" is simple. Uber drivers cannot be simply forced to work at the busiest or most inconvenient times. They have to be enticed to drive on New Year's Eve — an evening where many drivers would probably rather be partying than ferrying passengers. Higher prices are enticing. This is basic supply and demand stuff. Surge prices also encourage drivers already on the road to go to where demand is highest. In the absence of surge pricing, there would almost certainly be shortages and queues.
Uber did not invent market incentives. The company just exploits them. Allowing for demand-driven pricing is one of Uber's best features: it ensures the service is constantly available for those who need it. Surge pricing is one of the reasons Uber is walking all over the taxi market. Yes, it would be nice if our fellow citizens were happy to drive us around at the cheapest prices on demand at the busiest times, but as Adam Smith said, you can't run an economy on benevolence alone.
And yet it is undeniable that many people see price surges like those engineered by the Uber algorithm as violating an unstated ethical code. When a smaller surge occurred during the Sydney siege, the outrage was worse, as it seemed like Uber was profiting from the city's fragile state.
Supporters of markets have a habit of sometimes dismissing these concerns out of hand, but they shouldn't. Market exchange, as one of the basic forms of human interaction, has a deep ethical dimension. It needs to be defended.
The earliest traces of what we now call economic reasoning was preoccupied with the search for principles that would explain why certain goods were more expensive than others. The debate was concerned with how the "just price" was determined — a price which was fair and ethical according to the ideas of Christian justice.
Some medieval theologians and philosophers believed the just price was the price it would take to cover the cost of production plus a small profit. Thomas Aquinas argued that the just price was what a just person would agree to. Others believed the just price was whatever the prevailing local market price was.
This final explanation might seem a cop-out but it packed an intellectual punch in the medieval period. According to these proto-free marketeers, the just price was that which could be freely and voluntarily agreed to by two independent agents. After all, one of the alternatives to the market setting a price is if a lord sets a price by diktat, and forces those they rule to sell for less than market value.
Social institutions are about trade-offs, not solutions. There is no perfect way to resolve the tension between supply and demand. Unless market participants are forced to provide a service, that service will either be rationed by price or it will be rationed by queuing.
Surge prices seem to offend our sense of egalitarianism, but as Jason Brennan and Peter M Jaworski point out in their recent book Markets Without Limits, queues are not very egalitarian either. Queues don't treat everybody equally. Queues favour those who are willing to spend time in queues. Not everybody has that time. Some people really need an immediate Uber ride, to get home to babysitters or because they are unwell. Others merely want a ride.
Psychologists and behavioural economists have spent decades documenting all the irrationalities, systemic errors, and cognitive biases that lead humans to make bad decisions. The intuitive revulsion many of us have to market pricing in moments of extreme demand ought to be one of them.
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