Price Imperfect

Price Imperfect

Price Imperfect

Car and DriverAs comfortable as an Uber ride is, it sure seems to cause a lot of distress. Recently protests against Uber rolled Europe, even as the company was flexing its muscle with an $1.2 billion capital raise at a valuation in excess of $18 billion. Uber’s international expansion has been remarkable, as this graph illustrates. And not to be outdone with Taxi Cab Confessions, the company has spawned a few stories too.

Sometimes overlooked in their stratospheric growth is something more ambitious than just reinventing the hired transportation market.  Uber is also trying to change how consumers view pricing, by instituting demand-driven surge pricing.  The dynamic pricing model has not always been well received by customers. Which is a shame, since it is worth understanding.  Benchmark’s Bill Gurley has penned one of the more cogent essays on surge pricing, including both the history and economic theory at its foundation. And he makes the clear observation:

…try the following experiment: the next time you see a message indicating that Uber’s surge pricing is in effect: immediately try an alternative other than Uber. In other words, try to hail a cab, call a traditional black car service, find a rental car, or jump on a bus or subway. You will find that availability and reliability for all forms of transportation are under stress at that same precise moment in time.

 

Dynamic pricing exists in a number of industries (mostly travel) and probably should in others – the music industry has been talking for years about why the new hit album (think Beyonce) costs the same as an unknown band releasing their first record. The biggest change Uber may make is less in transporting people and more shifting the way we all regard price.

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