When A $65 Cab Ride Costs $192
Friday, January 24, 2014
I was in the car for about an hour, rolling around Manhattan in the middle of a snowstorm. The ride normally would have cost me $65. But when it came time to pay, my driver, Kirk Furye, was concerned for me.
"Are you going to get in trouble with NPR?" he asked. "You are almost at three times the [normal] amount."
Final cost of a one-hour cab ride: $192.00.
I had found Furye through Uber, a company that makes an app that connects cabs and cars with people who are looking for rides. One thing about Uber: When there's a lot of demand -- like, say, in the middle of a snowstorm -- the price goes way up.
Uber calls this surge pricing; a lot of people might call it gouging. But Uber drivers aren't employees with hourly schedules; they choose when and whether to drive. And, Uber says, raising prices when demand is high is a way to get more drivers on the road to meet that demand.
Uber tracks customers and drivers down to the street level, and even in normal weather there can be brief price surges in neighborhoods when demand spikes.
"When I first started out, I used to chase the surge," Furye said. "But that became exhausting, because it would always go somewhere else by the time I got there."
In other words, the surge system was increasing the supply of drivers to busy neighborhoods so quickly that, by the time Furye got there, prices had fallen back to normal.
But even if it works in the short run, surge pricing could hurt Uber in the long run if taken to extremes, says Richard Thaler, an economist at the Chicago Booth School of Business at the University of Chicago.
Other industries that raise prices when demand is high, like hotels, put limits on their own surge pricing in order to keep customer loyalty. Hotels will rarely charge more than three times the normal price, even though they could charge far more at peak periods, Thaler says.
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