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Uber Surge Pricing: Market Success or Market Failure?

Gerry Reilly, Senior Teaching Fellow

Faculty Blog

You’ve probably heard of it, but Uber is an American company that has disrupted traditional taxi services around the world. Uber provides customers with a smartphone app through which they can submit trip requests that are routed to drivers who use their own cars to take you to your destination. Uber is currently available in over 300 cities around the world and was estimated to be worth around $50bn in May 2015.

Uber has a method of pricing based upon distance travelled and time taken for each journey, and collects a 20 per cent cut of every fare. That said, when supply and demand patterns change, Uber uses an algorithm to increase prices to ‘surge’ levels. These price increases are designed to attract a larger supply of drivers when there are more customers, and also keep a lid on demand. This should mean that you can always get that ride home, even on the busiest and wettest night of the year – assuming you are prepared to pay. Supply and demand should adjust in response to these price changes.

This doesn’t always work in the company’s favour though. Uber ran into controversy during the Sydney hostage crisis of December 2014. Over 40 people were held by a gunman amidst fears of a terrorist attack. Uber immediately announced on Twitter that prices were going up four times. Users were outraged and the company quickly performed a U-turn and offered free transport out of the area.

If you have visited Edinburgh, you may have experienced a rainy evening waiting in a taxi rank queue. Indeed, you may have found yourself waiting for a long time because all the taxis are busy with other passengers. That’s because Uber hasn’t been launched here yet.

They plan to launch here soon though, and with the City Council reducing the cost of a private hire licence from £1614 to £500, there has been a dramatic increase in the number of applications for these licences. This raises a few questions.

Will we see the traditional black cabs replaced in Edinburgh by Uber private hire drivers?

Will the supply of Uber drivers be sufficiently price-elastic to respond to the surge pricing model?

Or is the argument less of an economic one? Will the people of Edinburgh see surge pricing as ‘unfair’ and react against Uber (in the same way that people would not expect a department store to double the price of an umbrella whenever it rains)?

Will concerns that drivers are not sufficiently licensed mean that the black cabs will reign in Edinburgh for the foreseeable future?