Why Uber’s Surge Pricing is Great and You Should Love It (And Not Sue)

TravelSkills covers a lawsuit in New York alleging that Uber’s surge pricing amounts to price fixing under anti-trust law. The suggestion in the suit is that Uber’s app creates a cartel.

Travis Kalanick, chief executive officer of Uber Technologies Inc, failed on Thursday to win the dismissal of an antitrust lawsuit accusing him of scheming to drive up prices for passengers who use the popular ride-sharing service.

U.S. District Judge Jed Rakoff in Manhattan said Kalanick must face claims he conspired with drivers to ensure they charge prices set by an algorithm in the Uber smartphone app to hail rides, including “surge pricing” during periods of peak demand.

“In creating Uber, Kalanick organized price-fixing among independent drivers who should be competing with one another on price,” he said. “Today’s decision confirms that apps are not exempt from the antitrust laws.”

This may be one of the dumbest claims I’ve come across with respect to Uber.

If surge pricing is a problem then all of Uber’s pricing is a problem. Uber sets the price in an area for all its drivers. But drivers often work on multiple platforms — and Uber competes on price with Lyft. And cabs. And alternative forms of transportation.

The relevant market here would have to be setting pricing within a firm rather than across firms.

Of course taxi regulators set price for all taxis across firms and the very point is to prevent competition. They also limit the number of cabs to prevent competition. The suit should perhaps argue that federal antitrust ought to preempt state price fixing.

On the other hand Uber consistently lowers prices. That is a complaint of drivers.

So we have an attempt at a class action of people ostensibly harmed by voluntarily accepting rides at a freely agreed-upon price for something that may not have been available otherwise.

And in any case Uber doesn’t raise or lower fares for all drivers — rather whether or not rates change depends on the exact physical location of each ride request, meaning the location of the customer and not even where the driver is located.

New York’s Attorney General doesn’t think surge pricing has anti-trust problems, in fact the attorney general’s office has entered into a formal agreement with Uber that allows while limiting surge pricing during emergencies.

More fundamentally, surge pricing is great.

  • It’s never a surprise. It pops up on a customer’s screen. When it’s more than a de minimis amount You even have to type in the multiple to confirm it. You can’t be charged for surge pricing without acknowledging it first.

  • Most of the money goes to the driver, not to Uber. Uber takes the same 20% cut during a surge that they do on regular rides.

  • It balances requests for rides with available rides. People with a real need get rides, others are encouraged to take alternate forms of transportation or wait for the surge to end.

  • It makes more rides available. It brings drivers into the surge area, when they might not be driving at all. Take a snow storm, at regular prices you stay warm at home, at surge prices you provide service if you’re a driver. That benefits drivers and gets riders where they’re going. And when drivers enter the area, the surge ends.

The degree of the surge depends on the imbalance between riders wanting rides and drivers available and willing to provide rides.

I’ve paid surge pricing — arrive at New York Penn Station. 4pm on a Friday. Raining. Shift change. You won’t get a cab on the street. Cab line an hour long. Uber, 1.25x pricing, a few extra bucks and I was on my way to my hotel in about 3 minutes. Bam.

THE ALTERNATIVE TO SURGE PRICING IS NOT ENOUGH RIDES AT ANY PRICE. The alternative ‘surge’ pricing is infinite. Uber adds capacity, provides a service that wouldn’t otherwise exist.

As I’ve written before, economists love surge pricing, people who don’t understand economics hate it.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. @Gene,

    If you think they are playing dirty tricks, feel free to waive down a cab. If enough of you do that, it will lower the surge!

    In all seriousness, Uber is thriving due to its very capitalistic nature. Supply and Demand.

    Go uber!

  2. So surge pricing is, in and of itself, anti competitive? An odd theory, as pre-set across the board ordinary pricing is just prone to price setting.

    .But here’s a novel idea – set the basic price to what is currently the surge price, but offer a “discount” price 80% of the time. Then people won’t perceive that they are getting gouged.

  3. I’d be interested in how Uber’s surge pricing compares with Lyft in markets where the two compete and, if possible, the differences between Uber’s surge pricing in markets where Lyft is active compared to those where Lyft is not active. I kind of doubt whether such studies have been done, and don’t know what the result would be even if the research is available. But still, it might illuminate some key issues in this debate.

  4. There @Gary goes again, shilling for Uber – I assume it’s only a matter of time before we see a “Sainthood for Kalanick!” post.
    The dirty trick IMO is to lower the prices below a livable wage, and then jack it up 1.7x when people actually need / use the service. So drivers get screwed most of the day and riders get screwed the rest of the day. Instead of a flatter, more constant price scheme. Sure economists disagree but the floor really matters.
    Also, I’ve been told repeatedly by drivers in Denver you can’t drive both Uber and Lyft at the same – Uber measures your “idle time / response to ping” time. If you come and go (because you picked up a Lyft rider) you are actively penalized.

  5. I agree in theory, but where Uber is playing in a very grey market is not capping the total price a customer can be charged for any single ride. Specifically, in D.C. when there are snow events, rides to/from DCA/downtown can range upwards of $300 to $400 due to surge pricing. Additionally, we’ve all heard the stories of some poor drunken soul waking up the next day to a $1000+ ride after paying 6x or 7x.

    I do think surge pricing is a valuable tool, but I never agree that a single ride should cost someone an obscene amount of money like that. Yes, yes, I know there is the fare estimate button, but I have never heard Uber successfully argue why a ride should be valued at over $200. Each time you read those stories they have usually agreed to negotiate something with the complaining customer. Just put a cap on the fare and don’t charge drunk people $1000 and all your PR problems go away.

  6. A few comments on your 4 bullet points:

    1) Yes, it is not a surprise. But given how dominant Uber has become in some markets extreme price jumps at short notice could still be a problem.

    2) Uber generally keeps more than 20% of the fare (depending on market and type of car).

    3) There is some evidence that surge pricing is not balancing requests, but that it is set such that the maximum amount of money is obtained from riders. That is, there are settings where there are drivers that would be willing to accept a fare X, and riders that are willing to pay it, but Uber sets the price to Y > X in the hope that a “high willingness to pay” customer comes along. This hurts drivers and consumers.

    4) There is no evidence that surge pricing brings out more drivers. This is a story that Uber loves to tell, but whenever people get data on this it turns out not to be true (or minimal at best) except for special events like New Years.

    In summary, you are repeating the marketing claims that Uber makes, without realizing what they actually do.

  7. Unless you have open access to Uber’s database, most of your statements are nothing more than conjecture. Speaking as an occasional Uber driver, surge pricing is ridiculous. Drivers are at Uber’s mercy when they CONSTANTLY keep slashing rates in various cities to where you can’t make a penny off a ride. Subsequently, drivers are also at its mercy when surge pricing randomly goes into effect, and let me tell you there is no shortage of nasty comments from riders when surge is happening. And that can lead to lower star ratings for drivers, even though we have nothing to do with it! Does it bring more drivers onto the roads when in effect? Give me a break, how would drivers know other than the broad generalized text messages Uber sends out to them?!

    If Uber wants to classify drivers as independent contractors, then this lawsuit has a very valid point over the control the company has on its ‘dynamic’ pricing.

  8. “Also, I’ve been told repeatedly by drivers in Denver you can’t drive both Uber and Lyft at the same – Uber measures your “idle time / response to ping” time. If you come and go (because you picked up a Lyft rider) you are actively penalized.”

    This would be anti trust behavior. Forcing independent contractors not to choose their best option.

  9. I have no issue with surge pricing in theory, it’s the implementation that creates the potential for abuse. Currently here in Tampa, we have a serious issue with surge pricing abuse by drivers. At the beginning of the year, Uber drastically lowered the mileage rate and compensation rate for drivers here. So I have been told by a number of drivers who didn’t leave Uber, that they have figured out how to game the system and they have enough drivers participating through social media that the system appears to be working. Basically, by leaving the Uber app running, but listing themselves as unavailable, they are able to create artificial surge pricing. Once surge pricing kicks in, they receive notification of the surge and then they all flip back over as available and get calls. Once the surge ends, rinse and repeat. Originally I was a bit skeptical of this scenario, but considering the airport is the one area Uber never allows a surge in Tampa and you now consistently can never find a car at the airport, regardless of the time of day, I tend to believe this is actually occurring. I don’t think this system would work very well in larger cities, but it certainly is an issue in a smaller city like Tampa. While I appreciate the driver’s plight and feel that the current mileage rate is too low, I do have an issue with using the surge pricing to justify a higher wage, especially when Uber doesn’t seem to care about limiting this abuse. (Uber doesn’t even provide a method to give feedback regarding this issue)

  10. According to the lawsuit’s logic, any chain that requires consistent pricing between its franchises is participating in price-fixing. The $5 foot long undermines capitalism.

  11. Gary and I may have different views on many issues but i’m with him on this one. A lot of the claimant’s about Uber just seem to come from, well, stupid people.

    There are some stores I don’t like for various reasons, I don’t bitch about them, I just don’t spend money there. Easy. If you feel like Uber’s surge pricing is a rip off or they treat their drivers unfairly, just don’t use Uber. If enough people agree they will go out of business. Uber’s business model requires surge pricing, if you don’t think that is ok, then you don’t think Uber should exist. So fine, don’t use it Uber and it is just like Uber doesn’t exist.

    I use Uber all the time and have never seen the fare calculator be off by more than a few dollars. Yeah, desperate people at time use Uber despite the surge and then complain it was expensive (trying to get to airport in snow storm for example). These people want the benefit of Uber but not to have to pay for it. That is like wanting a BMW but only wanting to pay for VW. It is not how it works.

  12. I take an average of two uber rides a day (in various cities).

    I think the surge pricing is brilliant, in that it functions as a market maker. I’ve talked with drivers who sit at a coffee shop working on their great american novel or screenplay until the surge hits 2.5x, then they punch in. When I have time to wait, I just punch the “notify me when surge down”. Thus, supply and demand get automatically negotiated making for a better overall average experience.

  13. I have no issue with Uber’s surge pricing. If it’s more than 1.2-1.5x times I just hail a cab or take the subway. However, I think it practice they try to make the system too dynamic. How quickly do cars come on the road when it’s raining, snowing, etc. to capture the surge pricing? Perhaps a better solution would be to preset “peak” rates during rush hour, weekend nights and special events when demand is typically high. That way riders know in advance the cost and drivers can plan to come on the rode at that time instead of reacting to surge pricing that might go away in 30 min.

  14. @ Credit I am sure it’s anti-trust behavior – the criticism was with Uber, not Lyft. But Uber would never break the law (er disrupt) , would they?

  15. @Bode – that “dirty trick” you speak of… it’s called supply – demand.
    Restaurants don’t stock waiters at 2:30pm, or let off on days with low demand. I assume you’re not anti-restaurants… and most all businesses.

    Also, just because a driver told you something in Denver, doesn’t make it true.

    Personally, I’m for the sainthood of Kalanick. Uber is a life saver. This is crazy, but before Uber, I had to use taxis. Can we talk about “dirty tricks”?

  16. Uber is an absolute lifesaver in the suburbs where you don’t have a ton of taxis roaming the streets. Where I live, I can’t recall seeing any taxis on the street. EVER. I gladly accept Uber’s surge pricing.

  17. I’d have less of a problem with surge pricing if the driver received all of it. What extra service does Uber, the app/company, provide during this time?

    There needs to be some legitimacy to the surge timeframes in a given area. I can open the app, it not be Surge, close reopen – surge, close reopen – new surge, wife opens – no surge. Meanwhile there is a notice that the rate is “set to expire in X minutes”.
    Make the surge windows transparent, for specific periods of time. That way both customer and driver can proceed accordingly. My need might not be as urgent as the next person, and I can wait it out. But during this time, rates could increase!

  18. Uber pricing would be brilliant if it were predictable. Unfortunately, it is ALWAYS a surprise. In the early days of Uber I had to go to the airport one day, and thought I’d call an Uber instead of prebooking a car. Instead of paying $55 for the car (a crappy taxi would have been around $60), I found the surprise of a 3x gouge — and paid close to $150 as there was no time to call a taxi. What a huge surprise.

    Also, how can Uber be allowed to gouge 52% of the time in San Francisco? The posted prices are applicable less than half of the time, while the majority of the time the price is a surprise until you open the app? That’s the definition of gouging, and it’s definitely not “surging” since surging implies an exception, instead here it’s a norm.

    Finally, I know that drivers form cartels, and message each other to go offline at the same time for 90 seconds, which will trigger gouge pricing, so that when they get back online they’re making more money.

    Uber’s a great idea (it was actually Lyft’s and Sidecar’s), but its surge pricing implementation totally sucks and has turned into gouging wiht a PR veneer to get people like you distracted from seeing the truth. I only hope for this lawsuit to contain the craziness of gouging — not eliminate it, but make it reasonable. Peak pricing works in multiple cities to incentivize people to work when they might not. We need no more $500 rides just because there was a shooting and people wanted to leave (true story) — that’s pure gouging, as it definitely didn’t add any more drivers to the pool.

    P.S. the same field of economics that look at Uber “surge” as nirvana also lauded Martin Shkreli for increasing drug prices (demand and supply balance), think that kidneys shouldn’t be donated but should be sold (they have a value after all), and that people should not give to charity (there’s no monetary benefit from doing so). Their model of human behaviour is so flawed it’s a shame that you even parrot them.

  19. Interesting consequence of Uber classifying its drivers as contractors and not as employees. If the drivers were employees, there would be no antitrust issue on pricing, as Uber and the employee-drivers would be a single entity and the employees would just be charging the price mandated by their employer. But there is at least a plausible price-fixing claim if Uber sets the price in an area and then colludes with hundreds or thousands of supposedly independent contractors (who are theoretically all competitors) to charge the fixed price. It’s an uphill climb for the plaintiffs — hard to show an actual conspiracy — but the claim is not absurd.

    Also — not entirely clear from the post, but Uber is not a defendant in the suit. Just the CEO.

  20. I have evidence that surge pricing DOES bring out more drivers. I drive part-time. I check my driver app after work or when I’m in San Francisco to see if it’s surging where I’m at. If it is, I drive. If it’s not, I go home. Driving non-surge for minimum wage simply is not worth it. I know I’m not the only driver who does this.

  21. Let’s all remember the most important fact here, during surge pricing an Uber representative holds a gun to your head and forces you to accept the price and ride with Uber.

    If you don’t want to use Uber during surge pricing use Lyft or try your luck at hailing down a cab. Does everyone forget how cabs would refuse to take you if your trip is too short or if you didn’t pay X amount in cash?

    Surge pricing ensures more drivers will be out on the road, at that point the decision is on you. Is paying $10-30 more worth your time? If it it’s not, then wait 30-40 mins till surge pricing goes down.

    @James, I took an Uber on NYE around 5x surge pricing from DC to Arlington, it wasn’t even $100. not sure were your getting $400. Maybe going to Baltimore during a snowstorm?

  22. @Nathan Drake “during surge pricing an Uber representative holds a gun to your head and forces you to accept the price and ride with Uber.”

    Indeed the crucial point here is that no one is holding a gun to your head. They are offering you a service at a price you can accept or reject. That you really really really want the service without paying that price isn’t relevant.

    And without surge pricing demand would be higher meaning that there would be people who really really really want the service but without enough drivers on the road, just like the cabs you dismiss as an alternative who… aren’t allowed to have surge pricing!

    I

  23. I agree with Gary on this one. Think about how people rode lousy taxis before Uber and Lyft. Entry alone into that market caused improvement in quality and price.

    The only issue is one of information disclosure. The consumer needs to know the price before booking the ride. He/she can then make an informed choice. (Or not so informed, if inebriated — in which case, he/she will pay the price for the choices he/she made in getting that way.)

    As for driver compensation, no one forces the driver to be a driver (or anything else). If they want to do something else (bag groceries, work construction, practice law, run for office, etc.) they are free to do so if they can get the job and do it.

  24. I can remember a form of surge pricing in Tokyo in 1972. If you wanted a taxi to pick you up in rush hour on a rainy day, you held up 2 or 3 fingers to indicate the multiple of the fare you would pay.

  25. UBER sets the prices, not the drivers. If they used a bidding or auction algorithm where drivers set their own prices, then supply and demand would truly set the value of the trip.
    The “penalty” to riders during a true surge would be a delay. I claim there is no real surge, but rather corporate greed. I have paid surge pricing and saw even more cars on the street than when it was not ‘surge’ pricing.
    Imagine the grocery store quadrupling the price of a gallon of milk the day before a snow storm: would that be fair?
    I hope they loose their lawsuit and have to re-pay those they have harmed in their quest for profits.
    Don’t get me wrong; I like and use Uber. I just disagree with gouging customers when demand is high. Maybe raise rates during busy times, but by 10-15%, not 400% like last Saturday in Las Vegas.
    Greed invites regulation.

  26. Lots of comments seem to don’t know what supply and demand is:

    . If surge is only for a preset time and period, then it is not real time supply and demand. If there is 1 driver now at 2x surge there will be none in 10 minutes! Because someone else requested that car. What difference does it make when there is no surge but there is no driver?

    . And wow drivers gaming the system like passengers don’t. Remember, it is real time surge. Which means if at 2x surge there are 10 cars showing available it will quickly drop to no surge, then what is the complaint? This exactly how surge works great, these drivers won’t even drive without surge, if you force flat rate there is no driver for you whom don’t want to pay surge, as well as those who are willing to.

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