Newspaper article International Herald Tribune

A Chauffeured Test of Supply and Demand

Newspaper article International Herald Tribune

A Chauffeured Test of Supply and Demand

Article excerpt

On New Year's Eve, a customer paid $135 for a one-mile trip with the Uber car service company. While many customers were unhappy, Uber expects to keep dynamic pricing on big holidays.

On New Year's Eve, Dan Whaley, a technology entrepreneur in San Francisco, got into a black Town Car and was driven one mile to a holiday party. The ride cost him $27. At the end of the night out, Mr. Whaley took a Town Car home from the party. The return ride cost $135.

Mr. Whaley was using Uber, a service currently available in six U.S. cities and in Paris that lets people order private drivers through a smartphone application. On New Year's Eve, Uber adopted a feature it called "surge pricing," which increases the price of rides as more people request them.

Although New Year's Eve was very profitable for Uber, customers were not happy. Many felt the pricing was exorbitant, and they took to Twitter and the Web to complain. Some people said that at certain times in the evening, rides spiked to as high as seven times the usual price, calling it highway robbery.

Uber's goal is to make the experience as simple as possible, so customers are not shown their fare until the end of the ride, when it is automatically charged to their credit card. In a blog post on its Web site, however, Uber says that it had warned clients before New Year's Eve of the new pricing. It also said that when clients ordered cars that night, they were presented with the price multiplier and told that prices would go down if they were willing to wait.

Economists call this "dynamic pricing." It is deployed by only a small number of businesses, like hotels, airlines and car rental companies, which raise prices on weekends and holidays, when demand increases sharply.

So why do people accept this pricing from airlines and hotels but became irate with Uber?

"With regular day-to-day decisions, consumers like predictability and don't like to see prices change," said Dirk Bergemann, a professor of economics at Yale University. "People are trained that there is a level of predictability with purchases. There will be a regular price for a bottle of ketchup and a relatively average price for a taxi. …

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