By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Surge pricing is what car service Uber calls its reliance on the market mechanism. The use of price to balance supply and demand is a perfect example of standard economic theory in action. It is also a good example of why market economics can have an anti-social edge.
Uber finds the market-clearing price with an algorithm rather than the auction found in textbooks. But the principle is the same. As the fare goes higher, more drivers decide to stay on the road and fewer would-be passengers decide to use the service. While Uber’s calculation is biased to maximise rides rather than driver revenues – it will choose 10 fares of $10 over one fare of $100 – the balancing price can be as much as seven times normal.
The surge approach is not new, but it has become more common in recent years. Hotels and airlines charge low prices off-season and very high prices during holidays or conventions. Restaurants, utilities and shipping lines try to guide customers with discounts and surcharges. For such enterprises, which have high fixed costs and face quite sharp changes in the natural level of demand, it makes sense to encourage customers to use their facilities when they would not naturally want to.
Still, considering how often the economy is described as a market system, Uber-style variability is surprisingly rare. Both prices for consumers and wages for workers are usually more or less steady through the course of the day and over the seasons. In percentage terms, the deviations created by money-off offers and higher rates for working overtime are generally pretty modest.