Surge Pricing, Markets, and Expectation in the Taxi Industry

Recently Uber's practice of "surge pricing" during storms or other periods of increased demand. On one level, this is a fairly standard story of a more efficient market beginning to form in a highly regulated and currently distorted market.

But, I have to admit, seeing receipts like these just lead to a visceral reaction that you just can't control if you're a New Yorker. Cab rides just SHOULDN'T cost that much!

This uncovers a few more layers of what's going on. There aren't just entrenched interests that want to keep the medallion system in place, but deeply entrenched expectations among consumers.

First, consumers have an aversion to what's perceived as unfair price gauging. Gothamist asks the question in this way:

But when does surge pricing become price gouging?
Basically, there is no discernible difference.
"The best way to look at it is during Hurricane Sandy," says one financial expert. "You had these long lines because there was a limited amount of gas. But if you had surge pricing, gas could have been raised to $10 a gallon and there would have been less people on the line."

Raising gas prices during hurricane Sandy has to be the most egregious example of gauging. But, it's still true that if gas prices could have been raised to $10 a gallon there would have been no lines. Those who absolutely needed gas would have been able to get it without an issue, and those who could have done without would be able to wait for prices to come down and find other ways to get around.

This begs the question of what is a fair way to ration things during situations like this. Is it ethically more desirable to give gas only to those willing to put in the time to wait in line? 

Sandy was a disaster however, surge pricing happens more regularly. If Uber continues its growth and eventual domination of car services, it won't take long for things to find a new equilibrium.

Lets say you're a potential UberX driver, and you see how this surge pricing happens. As a driver who has control over their schedule, you begin taking note of when these surge prices occur, and will begin to act accordingly. Surge pricing will train drivers to allocate themselves when their needed, and eventually the surges will be minimal.

There are still ethical questions that need to be answered. This still won't solve the problem of ensuring universal access of cabs for example, as the introduction of metered green outer borough cabs have. Even in a perfect Uber world, cabs will still be incentivized to cluster in downtowns.

On any side of a transaction though it's always healthy to try to get rid of a sense of entitlement. Medallion owners have no legitimate reason to keep their system in place, and consumers don't have an intrinsic right to a cheap cab ride regardless of the weather. An Uber like system will allow these unsustainable expectations to come to light, and end up in an overall better system.