Capital Ideas Blog


By Robin Mordfin

From: Blog

Remember when you were in elementary school and trading your lunch was the highlight of your day? You could swap one of your two HoHos for a bag of chips, but you could also get a grape soda for that one chocolate-and-cream treat if several different classmates clamored for your dessert. That practice has been repurposed by transportation start-up Uber, which arranges rides for people all over the world through their mobile app. As more users look for rides and the supply of available cars dwindles, Uber raises prices. As demand decreases, prices drop. Uber calls this surge pricing. 

This week, the IGM Economic Experts Panel considered whether using surge pricing to allocate transportation raises consumer welfare by increasing the supply of rides while directing rides to the people who most want them and reducing search costs. Nearly 80% of the panel participants believe surge pricing is beneficial. 

"Amazing that more things aren't priced this way—they should be," said MIT's David Autor. Stanford University's Darrell Duffie agreed, noting, "This is basic microeconomics. Pricing different services differently improves the allocation of services, assuming no serious externalities." 

Duffie's colleague, Robert Hall, indicated that such practices are a growing trend. "Real-time market clearing pricing is gaining ground, over fierce opposition from all but a small band of economists and entrepreneurs," he said. 

Not all of the panelists who support surge pricing are doing so from a purely theoretical viewpoint. Chicago Booth's Steven Kaplan wrote, "I have first-hand experience. Faced with long airport taxi lines late in the evening, the extra amount to use Uber is a bargain." Anil Kashyap, also of Chicago Booth, felt similarly. "The alternative is standing in the rain or waiting forever at rush hour, sometimes paying the premium is just much better," he said. 

Still, one fifth of the panel participants don't believe that surge pricing is a great idea. Princeton University's Angus Deaton pointed out that, "Efficiency is NOT the same as welfare! This is probably a good policy, but some people will lose." Markus Brunnermeier, also from Princeton, indicated his concerns by stating, "competition might be too limited on days with low supply and customers might be 'taken for a ride.'" 

Uber is planning to being servicing another 25 cities in 2014, bringing their surge pricing practices to new markets. But the real question is whether today's children will be sufficiently prepared to understand how the transportation company's system works. After all, most school systems have banned lunchtime trading, leaving our next generation without a fundamental knowledge of microeconomics.


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