Washington, D.C., might be taking a controversial page from Uber’s book. Last week two D.C. Council members introduced legislation that would allow the city’s mobile dispatch services to adjust fares based on demand, in a model known as “surge pricing,” for passengers booking rides through an app.*
If that sounds familiar, then it’s probably because private-car service Uber already does this, and has become somewhat infamous for the practice.
From a standpoint of pure economics, surge pricing is the most basic application of supply and demand: As the need for a service rises, its price goes up, too. The most infamous example of Uber surge pricing happened in December, when Uber fares in New York City spiked to seven or eight times the norm during a wet, heavy snowstorm.
Even in extreme situations, supporters of price surging argue it’s still a good practice. The logic goes something like this: On that miserable December night in New York, demand skyrocketed; people were freezing, the roads were in terrible shape, and free yellow cabs were almost nonexistent. But when Uber pumped its prices up, two important things happened:
- The incentive for drivers to work through the treacherous conditions went up, meaning more cars were likely to be on the streets.
- People who didn’t really need a car were less likely to book one, reducing the overall demand.
In short, the sudden price surge pushed up Uber’s supply and lowered its demand. And as a side benefit, each person who could afford to grab an Uber ride was one fewer person waiting for a yellow cab. In that sense, everyone benefited.
The problem with this, of course, is that even if the economics make sense, most consumers still hate price surging. There’s a reason big retailers like Home Depot and Target don’t routinely raise prices with demand—because customers would be furious. Even investment guru Warren Buffett, whom you’d expect to be a pretty rational guy about the basic forces of free-market capitalism, loathes price surging. He’s currently encouraging Berkshire Hathaway shareholders to escape the steep rates Omaha hotels charge during the company’s annual shareholder meeting by turning to Airbnb.
The point is, while price surging makes economic sense, actually allowing it will risk angering a lot of D.C. residents. Would they be right to feel that way? With Uber, I think the answer is no, but in the case of city cabs, it’s a lot tougher to say. That’s because all this discussion of price surging is really getting at a bigger issue: what the function of the D.C. taxi system should be.
In Uber’s case, price surging might not be popular, but it’s surely not wrong. Uber is a business, and its goal is to make money. It can do that however it likes, but to stay competitive, it needs to keep customers happy. D.C. cabs, on the other hand, walk a fine line between private and public. The individual drivers are surely motivated to make money like any other businessmen, but the industry as a whole is so tightly regulated by the city’s Taxicab Commission that it’s more a public monopoly than a free market. Don’t forget that when Uber first came to D.C., the commission proposed a set of regulations aimed at effectively shutting it down.
Correction, April 15, 2014: This article originally said the D.C. Taxicab Commission would set price surges for rides booked through mobile dispatch services. In fact, it is the mobile dispatch services that would adjust the prices. A section of the article based on this misinterpretation has been removed. (Return.)
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