Based on its business model, Uber lets passengers hail drivers from their smartphone, a move requiring even less effort than extending your arm. Some vehicles are not so much taxis as private cars that Uber has vetted. The convenience of hailing a cab from the comfort of a sofa or bar stool has given the service a loyal fan-base, but it comes at a cost. Most of Uber’s prices are slightly cheaper than a street-hailed cab. But when demand spikes, the surge prices kick in: rates during the busiest times, such as New Year’s Eve, can be seven times normal levels, and minimum fares of up to $175 apply.
During periods of excessive demand or scarce supply, when there are far more riders than drivers, Uber increases its normal fares with a multiplier, whose value depends on scarcity of available drivers. This so-called surge pricing uses microeconomics to calculate a market price for riders and drivers alike. The goal of surge pricing is to find the “equilibrium price” at which driver supply matches rider demand and riders’ wait time is minimized. Studies show that surge pricing achieves what it was designed to do: it brings more drivers online, and it allocates available rides to those who value them more.
There is some evidence Uber’s surge pricing is improving taxi markets. The firm says drivers are sensitive to price, so that the temptation to earn more is getting more Uber drivers onto the roads at antisocial hours. In San Francisco, the number of private cars for hire has shot up, Uber says. This suggests surge pricing has encouraged the number of taxis to vary with demand, with the market getting bigger during peak hours.
However, surge pricing has a major image problem. Hardly anyone has a good thing to say about it, and far too many people equate it with price gouging. This perception is a huge headache for Uber. Its key differentiator is flexibility and the