So, I was reading what is an interesting set of articles about Uber's lack of actual profit when suddenly in the middle I got a giant load of badecon and decided this would be a decent way to illustrate an issue I see people trip over often. The article in question, third of five.

The paragraph I wanted to focus on

"Uber’s Surge Pricing Does Not Increase Efficiency

Some Uber supporters have falsely claimed that its use of surge pricing[6] is a major breakthrough comparable to variable pricing systems in airlines, hotels and other travel industries. From his 30 years in aviation, the author has extensive experience with how modern pricing tools can actually improve industry efficiency and consumer welfare. Uber’s Surge Pricing lacks most of the market information critical to the benefits these systems create, used extremely crude (if not arbitrary) decision rules[7], and cannot achieve comparable efficiency impacts because urban car service market dynamics are totally different.

A comprehensive discussion is not possible here, but because people buy airplane tickets and hotel rooms well in advance, and have complete information about all of the price/schedule options in the marketplace these systems allow demand from both highly price sensitive and highly service/schedule sensitive customers to be satisfied while dramatically reducing capacity and operating costs. Airlines avoid buying planes for everyone whose first inclination is to fly on Friday evenings, and can offer huge discounts to people with schedule flexibility.

But research has long demonstrated that the timing of taxi demand is highly inelastic, (people want a cab at a very specific time)[8] so variable fares will not change demand patterns, improve taxi utilization or increase total revenue. All forms of urban transport have similarly inelastic demand; the Long Island Rail Road has had peak/off-peak pricing for a hundred years but rush hour is still rush hour. No level of taxi discount will get anyone to shift their Saturday night plans to midday Tuesday. Uber’s surge pricing simply raises fares (up to eight times normal levels) without prior warning. Given the short notice this does nothing to increase total taxi supply, but merely redistributes drivers to higher fare areas.[9]

More importantly, Uber’s surge pricing reduces overall economic welfare because the sociological distribution of urban taxi demand is bipolar; 43% is from people earning less than $20,000 (and 55% from people earning less than $40,000), most of whom do not have cars while 35% is from people with incomes greater than $100,000.[10] Studies show most of the lower-income demand is driven by jobs and services that cannot easily be reached by public transit, or trips at hours when public transit does not operate. Surge pricing reduces wait times for wealthier people returning home from restaurants and nightclubs by eliminating all service for lower income people working late night shifts that have no transit options. A pro-Uber paper by a major libertarian think tank simply dismissed these as “people who do not really need a ride.”[11]"

Now, what's actually nice here is that sources are provided for claims! But it still fails to understand industry efficiency (also known as producer surplus) and economic welfare (our producer + consumer surplus). The idea that redistribution of resources does not increase economic efficiency self defeating; the entire purpose of markets is to increase efficiency by moving resources to where they're most wanted.

Let's look at an example using our demand for taxis here, including a shitty MS Paint chart!. Area A is our non-surge place, consisting of apartment housing. Area B is our surge place, with the bars. It's a busy night, so we aren't worrying about downtimes. During the hours in the run up to our Surge they're identical using the chart for area A.

Our Uber drivers can decide which place to serve. If in our world of a set price you can only charge $5 for a ride, then you'll end up with 5 drivers in each area. This is a shortage for area B, as there's a higher demand as people want to get home from the bars because drunk driving is bad. We end up with a total economic welfare of 25 in each area; 5 rides of 5 bucks each per area, so $50 in total, or 6 drivers in B and 4 in A for the same outcome. This always gives us a shortage of 1 driver; remember, the data that is sourced here says that surge pricing doesn't actually increase the overall supply of drivers, just their distribution according to this piece.

But let's allow for surge pricing from our rational pricing firm, which moves the price for area B rides to $6. Now we end up with a driver swapping over to Area B if they weren't there already. This gives us a shortage in A but equilibrium in B. 4 rides at $5 in A + 6 rides at $6 in B leads to a total economic welfare of $56, an increase of $6.

Note that this is an increase in economic welfare and producer surplus; we've lowered the amount of deadweight loss, but also shifted some consumer surplus into the producer surplus.

However the article also commits the sin of misreading its source on surge pricing. While your more random surge pricing does not affect marginal driver behavior at the time, more obvious surges such as holidays and events do! There is also the issue that knowing that you'll occasionally be able to reap the benefit of surge pricing increases your overall value from becoming an Uber driver, which would probably increase the number of people willing to sign up and take passengers in the first place.

Now, I included the last paragraph because I think it does bring up a really good point; while we might find a more efficient distribution of resources, there are second order effects which have larger economic consequences. If our Evil Rich Capitalists drive up the price of Life Saving Drug due to its side effect of getting you really, really high, to such a price level that the poor can't afford it and all die off or are reduced to actual serfdom we're looking at a bad allocation of resources. But actually reading the source-Socioeconomics-of-Urban-Travel.pdf) there's not support for the argument made here.

Rather the key lines are “Taxi use is bimodal, with the highest usage among the poor and the affluent. For the poor, taxis provide the closest substitute for the cars they are less likely to own. For the affluent, taxis provide convenient access to airports and train stations, and quick local trips within downtown areas.” In the chart on page 66 we can see the split of Taxi by peak and off-peak along with household income, but as these don't track to surge pricing they're not exactly super useful outside of seeing the overall spread of taxi use.

While I definitely think this could use more research, you aren't actually showing that poorer citizens are losing out on taxicab services due to surge pricing in such a way that decreases their economic activity, just noting that taxis are used often among the poor, the actual argument that is being made by the author of this piece is pure conjecture and thus sin the second of a misread source. This jumps out as an issue for a piece that sources just about everything else; without being able to show that the demand from workers for taxis matches surge pricing, leading to people being less willing to work those hours (and this leads to a greater decrease in welfare than is gained by the customers who now get rides they wouldn't before) there's no reason to believe this is more than hand waving.

There's also very much a fairness argument to be made but that's outside the scope of this discussion.

There's also an oddity in numbers; the two reports he sources, with this-Socioeconomics-of-Urban-Travel.pdf) being the other one, have very different numbers, 41% on the second source vs 23.3% on the first. Granted the second source is from last year while the first is from 2001, but as they're both using the same survey type it's worth digging into why there was such a huge shift in the usage of taxis by everyone but the top bracket.

In conclusion, redistribution of resources is core to increasing economic efficiency and welfare. The author misunderstands what these terms means and makes arguments without having the proper evidence to make up his claims. You can claim that in a world where we only see shifts of supply due to price changes that we can decrease consumer surplus but not producer or overall welfare.

There's other arguments to be made about Uber I've heard which go against this piece, such as that it is profitable in some areas and has simply tried to expand into non-profitable areas, but I don't know enough to access the veracity of those claims.

^{GodIhopeIdidn'tmakeanydumbmistakes}