Surge pricing has lost all meaning
Demand is high! Or is it?
You may have heard Lyft wants to kill surge pricing.
“Prime Time, also called surge pricing by Uber, is where you basically don’t have enough driver supply, so you have to price it high so it can send more drivers out there and also sort of suppress demand,” Lyft CEO David Risher said recently, on the company’s quarterly earnings call. “That’s a bad form of price raising. It’s a particularly bad form because riders hate it with a fiery passion. And so we’re trying to really get rid of it.”
Uber didn’t create dynamic pricing, the term for changing prices with demand—airlines had been doing it for years—but it popularized it by making it so visible. In the early days, Uber made surge a signature feature of its digital taxi platform. It highlighted surge with bold price multipliers you had to agree to before booking and publicly defended the model. Uber co-founder and former CEO Travis Kalanick spent lots of time on Twitter and in the press explaining to the haters why surge was good for them as well as for Uber. Here he is in 2014 in the Wall Street Journal:
WSJ: What do you say to customers who are unhappy about surge pricing?
Mr. Kalanick: We make sure people see it and understand it before they accept. If they accepted it and then they’re upset that they accepted it, I think that’s just people getting used to dynamic pricing in transportation.
If you’re going and buying a hotel room, you know that prices can change. You know that if you don’t buy it now, the price could go down or it could go up. You know that if you buy a flight on the day before Christmas, it’s probably 10 times more expensive than two weeks after Christmas. You’re OK with that and you understand it. But in ground transportation, there’s been fixed pricing for 100 years. Because of that, there’s an education process.
Uber’s surge pricing turned out to be an excellent litmus test of your worldview. Some saw it as econ 101: demand rises and so do prices. Others viewed it as everything wrong with capitalism, proof that companies would use any means to extract the highest possible price. In the beginning, surge was generally unpopular and raised a lot of eyebrows. Customers routinely shared horror stories of hundred-dollar fares after concerts or on New Year’s Eve. Regulators took note after several big surges occurred during extreme weather, leading Uber to agree to cap surge during declared emergencies so as not to be accused of price-gouging.
But just as people got used to calling a cab from their phone, they also adjusted to surge pricing as the new normal. The horror stories quieted down. Uber’s explanation that surge helped to bring supply in line with demand became generally accepted wisdom. Even Lyft, which kept fares flat for the first few years, launched its own version of surge called Prime Time in late 2013. Always the nice guy to Uber’s bad guy, Lyft emphasized that it capped Prime Time at 3x (200%)—capitalism gone mild, not wild—but in 2016 it quietly eliminated that policy.
The most significant change to surge wasn’t any of this, though. It was the shift, led by Uber and followed by Lyft, from visible to invisible surge, or what Uber rebranded as “upfront pricing.” Upfront fares or pricing is the term ride-hail companies use to mean showing you the total price of your ride before you book. This is different from the original surge era, when surge appeared as a multiplier but the final sum was only revealed at the end of the trip. Uber frames upfront fares as simpler for riders: the price you see is the price you get. But in many ways upfront fares are anything but. The prices are still dynamic, but without any context. Instead of being told that demand is high and your fare will be too, you now have no sense of what a “normal” versus high fare even is. You simply get a price from the algorithm and have to decide if it’s one you’re willing to pay.
Willingness to pay is the operative phrase, because that’s what upfront pricing is designed for. In 2017, Bloomberg reported Uber was employing machine learning to calculate fares not only based on time and distance but also using what it knew or assumed about the rider. As then product head Daniel Graf explained to Bloomberg, a rider traveling from one wealthy neighborhood to another might be shown a higher price than someone heading to a poorer part of town, even if all other factors were the same.
In econ terms, this is known as price discrimination—selling the same product at different prices to different buyers in order to maximize sales or profits. Both Uber and Lyft do it. In the past year, both companies have also rolled out price-discriminated upfront pay to drivers. University of California Law professor Veena Dubal has an excellent paper on algorithmic wage discrimination where she argues that such pay practices allow firms “to personalize and differentiate wages for workers in ways unknown to them, paying them to behave in ways that the firm desires” and that “this personalized wage is determined through an obscure, complex system that makes it nearly impossible for workers to predict or understand their constantly changing, and frequently declining, compensation.”
The dominant ride-hail pricing model now is this: companies like Uber and Lyft charge one price to the rider, based on what they think that rider might pay, and offer another rate to the driver, based on what they think that driver might accept. Then they pocket the difference. The benefits to the platform are obvious. In the old world of pricing, Uber and Lyft promised drivers a fixed cut of the fare. Changing that rate would invariably spur protests and outrage, no matter how much Uber assured drivers that cutting fares would help them earn more. Upfront pricing decoupled what the rider pays from what the driver earns. The companies no longer have to pay a certain share or explain themselves when that share changes. The wider the gap between the upfront fare and upfront pay, the more the company earns.
I’m telling you all this to make the point that when Lyft’s CEO says the company wants to get rid of surge pricing, it doesn’t mean anything, because surge as we know it has lost all meaning. In the most recent quarter, Risher said the share of Lyft rides affected by Prime Time decreased 35% from the previous quarter. “It’s good for our riders, and it’s good for our overall market,” he said. That’s a great soundbite, but it doesn’t mean much when price discrimination is the starting point. Uber has also highlighted easing levels of surge pricing, which, again, sounds nice until you consider the backdrop of upfront pricing and a 40-plus-percent increase in average fares over three years.
Upfront pricing is one of the few things that makes me nostalgic for the Travis Kalanick era. It was refreshing for a company to be unabashedly honest about what it was doing the way Kalanick was about surge pricing. Customers might have hated those big blue multipliers, but they gave you the information you needed about what was actually going on. Upfront pricing might seem more palatable but in reality it’s a black box with a charming coat of paint. Of course Risher wants to phase out Prime Time: customers never liked it, and Uber and Lyft moved on a long time ago.
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