Uber Lays Bare Our Love-Hate Relationship With Supply And Demand
Having money sometimes means a chance to move up in the line or wait till the last minute, and sometimes not: Land Rover has a 9-month wait in the US for Range Rovers, but potential buyers even those willing to fork over as much as $60,000 to jump to the front of the line don't get that chance.
Matching supply and demand for sporting events and concerts in the US has spawned a bizarre patchwork of state and local laws applying to ticket resale, and a cat and mouse game of sophisticated programmatic buyers who try to monopolize initial ticket purchases and sell them later. Or fans could get lucky and take advantage of that luck for a profit. According to the NFL, 60% of fans who won the 1000-ticket Super Bowl lottery last year resold their $600 tickets within 24 hours for an average of $2,615 per ticket.
The problem is that the original price of these products is wrong. Concert tickets are too cheap - and so instead of the artist making more money, middlemen buy up the tickets and realize excess profits. If we really want to go to the game, we buy the higher price ticket. It's not really that the ticket ends up being too expensive, it's that it was too cheap in the first place. But something about this whole thing doesn't "feel" right. We don't want to feel responsible for those loyal fans paying sky-high prices; we'd rather blame the high prices on pejoratively named "scalpers."
So we hit refresh on the website and fruitlessly try to buy tickets that sell out in 5 minutes. Or we wait: hours, days or months.
Uber isn't trying to be a public bus service. Uber's goal is not moving the largest number of people. Its goal appears to always have a car be available in a given city. Uber theoretically would price the last car on its "system" at an infinite price - not that it would ever get there because more drivers would keep appearing as the price increases - but it should never run out of cars, ever. But because they're not individually pricing every trip and vehicle, "surge pricing" looks to customers like a blunt instrument to achieve that aim where a simple multiplier (like 6 times normal prices) "feels" predatory and imprecise, a "sharp number" you might say.
Uber appears to some to be a technology company, to others simply a car dispatcher, and to continue my ticket analogy, to some they are part Ticketmaster, and part scalper too. Most of all though they're a fast-growing but new company providing an innovative service that many love, and they're going to make some mistakes - and they're going to have luck, good and bad. Bad weather pricing may have been one of those strokes of bad luck.
As Nobel Prize-winning economist Daniel Kahneman and his colleagues discussed in a 1986 paper "Fairness as a Constraint on Profit Seeking", 82% of people thought raising the price of snow shovels during a snowstorm from $15 to $20 was unfair, and yet in other settings merchants can make similar price changes we accept. They showed we believe it is fair for a firm to raise its prices when faced with increasing costs, and it is fair for a firm to maintain prices as its costs decline but we feel it unfair for a firm to benefit by raising prices when demand increases.
Uber's pricing isn't price gouging. It's just in an area we are deeply conflicted about, and missing some transparency that would increase consumer trust. They could certainly give all or some more of their excess surge profits to the drivers, or show us more of the extensive data their Math Team produces but doesn't yet share- if their algorithms are as sophisticated as they claim then the benefit they get from sharing information with customers will outweigh any competitive concerns.
Also, Uber should find ways to let some consumers participate in price discovery, by bidding in real-time or engaging in the process some other way. eBay evolved from what was initially an auction site for niche items into an ecommerce ('Buy It Now!') site, by building consumer trust and offering fewer products that are hard to price, and instead more competitively-priced common products.
Lew Ranieri (who helped create securitization) described to me once how his team came up with the prices for the new asset-backed securities they created in the 1980's. "We made them up" - but once a price existed, then traders bought and sold these securities and the prices became real. Products become markets when their prices are no longer set by their creators, but by others.
If we didn't like Uber's service so much, or deeply grasp the need for the forces of supply and demand in various products to match better than they do today (with the help of increasing numbers of mobile computers in our pockets) and for them to transcend slow-moving regulatory monopolies, nobody would care or write about their "Surge Pricing", after all.
We just need to get more comfortable with valuing our time, or instead get ready to wait in yet another line.
Rob Leathern is the Chief Product Officer of Brand Networks. His day job is building software that makes millions of small decisions every day about whether or not to buy individual advertising placements.