Paying two, three or even ten times as much as usual for a taxi ride across town sounds like a pretty crappy deal, right? But I’m sure you can imagine times when you’d be happy to pay it – times, for example, when demand is so high that it’s impossible to get a ride. And that’s the theory behind Uber, a mobile app that’s aiming to use basic economic theory to eliminate taxi bottlenecks. And as it turns out, it just might end up being better for everyone.
On the face of it, the Uber app is a nice, clean, slick taxi app for Android and iPhone. You sign up with an email address, phone number and your credit card details – a nice detail which makes the whole process cashless.
When you need a cab, you open up the app and are instantly shown your own location plus location icons for all available cars, and an estimate of how quickly one can get to you. You enter your destination and get yourself an instant quote on the price, then hit a button to kick the process off. Nice implementation of a fairly standard process, really.
Where it gets interesting is when “surge pricing” kicks in. If demand is really high in a particular area, Uber starts putting a price multiplier on all fares in that area. This acts like a honeypot for the drivers, who take home the same percentage of any fare they get. The area gets an influx of cars, and hopefully the surge dies down.
In theory, it’s good for everyone. It gives an extra incentive for drivers to work peak times when they might not otherwise want to get out of bed. It draws more cars to where they’re needed most. If you’ve got the cash and you’re happy to pay the surge rate, it makes sure cars are available to you when they might not be otherwise. And if you don’t have the cash to fork out extra, at least it takes the richer or more desperate people out of the cab rank in front of you.
Uber does its best to make it very obvious when you’re paying surge pricing, including making you actually type in the surge rate if it gets too high. The company only wants to charge those rates to people who really want to pay them.
And in that way, Uber is an excellent example of basic economic theory in action. When demand is high, the prices go up, suppliers flood the market and the price stabilizes when supply meets demand. Uber doesn’t replace the regular city cab options, but works alongside them, and becomes a premium service in busy times.
And that ought to be good for everyone!