In an unrelated development, I stopped by Brooks Brothers recently to buy a sweater for a family member as a Christmas gift. I mentioned to the clerk that I couldn’t decide whether to buy the sweater now or late next week. “It will probably be 40 percent off next week,” she said. Strange, isn’t it? It's like Brooks Brothers has applied some kind of surge pricing to make sweaters more expensive before Christmas than after.
And I started thinking about a last-minute change of plans to go visit my sister in Los Angeles for the holiday. And I noticed a strange thing. Usually a round-trip flight from Dulles to LAX on United Airlines costs around $500. Yet for me to leave on Christmas Eve and return on the 26th would cost me, at a minimum, $1,172. That is some surge!
So obviously I am drafting an angry letter to the Better Business Bureau to complain of the nefarious business practices of the Regal Gallery Place, Brooks Brothers and United Airlines.
Well, no, actually I’m not. Because I’m not as bizarrely unfamiliar with how market mechanisms work as, apparently, a lot of customers of the Uber car service are.
For those who haven’t followed the whole contretemps, Uber is the service that lets you order a sedan service (or, increasingly, a ride in a taxi or a smaller car) from your phone. It works great!
But sometimes, inevitably, there are more people looking for rides than there are drivers available. There are a few ways Uber could handle this. It could create a waiting list, such that requests are fulfilled in the order they are received, likely leaving people stranded for extended periods of time wherever they are. It could just ignore the extra requests and tell people to try again later. Or it could do what economists the world over tend to think is the sensible thing: Adjust the pricing of the service until demand matches supply.
The price in this case isn’t just a system of rationing; it also helps increase supply by getting more cars on the road. If you’re an Uber driver off the clock and learn that you’ll make three times normal if you go to work and start driving people around, you’re probably going to do it, even if the weather is lousy and you’d rather sit comfortably at home.
In my experience, the service makes amply clear when you order a car if this surge pricing applies, introducing an extra step into the car ordering process to ask whether you approve prices that are 2x normal, or whatever the precise surge price is at that moment. People who order a surge-priced car without knowing it in advance aren't paying very close attention.
So why is it that people accept surge pricing for movie tickets, holiday gifts and airplane tickets as a matter of course, yet the surge pricing for a luxury car service spurs such rage? It boils down to consumer psychology.
First, there is the way that different companies carry out their surge pricing. In economic terms, a company that keeps prices high and then offers discounts part of the time is identical to one that keeps prices low and occasionally hikes them at times of high demand. But in terms of how people view the two, they are completely opposite. In the first, you’re sometimes getting a discount (yay!). In the other, you’re sometimes paying a penalty (boo!).
As the Wall Street Journal showed in an excellent report last month, retailers exploit this psychology all the time. Routinely the deeply discounted “sale” price you see on an item is still high enough that the retailer earns a profit; retailers frequently use sales as a core part of their marketing strategy, not just as a technique to unload unsold merchandise.
The second dimension of psychology that gets Uber in trouble with customers is this: People are much, much more comfortable with variable pricing when it doesn’t carry a tinge of exploitation. Whenever there is a hurricane or other disaster, and the affected area has a shortage of generators, gasoline, bottled water and other basics, woe be unto the retailer who tries to use dynamic pricing to match supply with demand.
And that’s where Uber got into trouble most recently. Most of the time, the service is just a luxury car service for urban professionals to get somewhere in a nicer car than your typical taxi. But when there is a snowstorm and people don’t have a good way to get home, it becomes closer to essential, and people feel like they’re being exploited rather than buying a luxury good at a somewhat higher price than they would prefer.
Anyone who has tried to catch a cab home from a bar on a frigid New Year’s Eve at 1 a.m. knows how unpleasant it can be, as taxis generally can’t adjust their prices to match supply to demand. But the whole equation changes when the situation involves not drunk people trying to leave a late-night party but people just trying to get home to their families in the snow.
In other words, when the weather outside is frightful, so is surge pricing.