Uber, surge pricing, supply and demand

Today a gunman is holding staff and customers hostage at a cafe in central Sydney.

At the same time, the algorithm that calculates the prices for the peer-to-peer taxi-firm, Uber, increased prices up to four times.

Minimum fares rose to 100 Australian Dollars (£53).

People took to Twitter to vent their outrage. If you’d like some examples here are three picked out from the thousands. One, two, three.

The same thing happened in New York during Hurricane Sandy two years ago. When people needed a lift most, they doubled the fare.

It’s hideous isn’t it? Shameless profiteering right? Wrong.

Uber’s surge pricing algorithm actually helps the people who need it most.

When Uber raises the minimum price it does two important things.

  1. It increases the incentives for drivers to get out in their vehicles and offer rides.
  2. It discourages people from taking rides unnecessarily.

In other words, surge pricing simultaneously increases supply and decreases demand. More Uber cars on the road and less people hailing them.

Those who don’t need a ride urgently won’t pay the extra fare. They won’t use a car that someone else needs more. This will free more cars up for others. Those who do need a ride urgently will have more available to them and they will be picked up more quickly than usual.

At face value surge pricing during a crisis may seem evil. And maybe A$100 is too much. But, on the contrary, Uber’s algorithm is effecting supply and demand in real-time to provide more to those who need it and less to those who don’t.

To frame it differently, consider the question: would you prefer a A$100 taxi when you desperately need it, or no taxi at all.

Hey. I’m Alex Murrell. I'm a Planner at Epoch Design in Bristol where I help deliver highly creative, innovative and effective pack, instore and online communications for some of the world’s biggest FMCG brands. Want to know more? You can find me on Twitter or LinkedIn.

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