Perhaps you've heard of Uber,
a company that allows customers
with smartphones to request
a ride from Uber drivers who
use their own cars.
So if you're in need
of a ride somewhere,
you might use this smartphone
app to request a ride,
then Uber would route that
request to a driver who'd
come and pick you up.
But what if there aren't any
drivers available to respond
to the request?
How does Uber ensure that
it has enough drivers
to match with passengers
at any given time?
One way Uber does this
is through surge pricing.
This is a strategy that uses the
principles of supply and demand
to set the price.
Let's say that at a given
time in a given area,
Uber sees that the number
of people who want to ride
exceeds the number of
drivers who are available.
That is, the demand
for drivers is greater
than the supply of drivers.
In such a case, Uber
may use surge pricing
and increase the
price for a ride
by some percentage--
maybe 20% or 50%.
In extreme cases, Uber can even
double or triple the price.
Let's think about
what happens next.
If you're someone
who needs a ride,
you might be a little annoyed.
The price for your
ride just went up.
Do you still want to ride
at this higher price?
Well, it depends on how much
you really wanted the ride
in the first place.
For some people who
really need the ride,
they're willing to
pay the larger fare.
But some people might think
the new price is too high
and opt to walk or
take a bus instead.
So demand for Uber
drivers will likely fall.
This is the law of
demand in action.
Ah, but what if
your Uber driver?
From this perspective, the surge
pricing looks quite different.
If you're already out on the
road driving passengers around,
the amount you get paid for
each ride just went up-- great!
But maybe you weren't
out on the road.
You're sitting watching
your favorite show on TV
and Uber sends you
a message saying
that surge price is in effect
and the fares have doubled.
Maybe this is enough for
you to pause your show
and start picking up passengers.
So the supply of drivers
will likely increase.
We started with a case in
which the demand for drivers
was greater than the
supply of drivers,
meaning some people who wanted
rides couldn't get them.
With surge pricing, Uber
decreases demand and increases
supply with the goal of
finding the equilibrium where
demand equals supply.
A good example that shows
what surge pricing does
is actually a case in which the
surge pricing mechanism broke.
Due to a technical
glitch, Uber surge pricing
was not in effect for 26 minutes
in New York City starting
at a little past 1:00
AM on a night in 2015.
Now on a normal
Wednesday night, this
might not be that big a deal.
Unfortunately for
Uber and for thousands
of people wanting a
ride, this was not
a normal Wednesday night.
It was January 1st and the
clock had just struck midnight
about an hour earlier.
So what happened?
Take a look at this
graph that shows time
on the x-axis and the percentage
of New York City Uber requests
completed on the y-axis.
This graph shows
that only minutes
before the technical glitch,
nearly 100% of requests
were being fulfilled.
But for those 26 minutes during
the surge pricing glitch,
fewer than one in five
people who requested
a ride got a ride.
Lots of passengers requesting
rides at the regular price,
but few drivers were willing
to brave the New Year's Eve
traffic at that price.
Once the glitch was
fixed, the figure
went back up to nearly 100%.
This is supply and
demand in action.
At times, Uber surge
pricing strategy
can be controversial,
for example,
in the case of a natural
disaster or safety
emergency, when Uber surge
prices may be perceived
as taking advantage of people
who really need transportation
and have no other options.
But what is
uncontroversial is the way
in which the combination
of supply and demand
work together to jointly
determine prices.
