Article: In New York post-Sandy, the lack of subways can be just as troubling as

Question

Article: In New York post-Sandy, the lack of subways can be just as troubling as the lack of electricity.... Plenty of other people in New York are turning to car services this week. But Uber, a San Francisco-based start-up with operations in most major cities in the United States, said it was struggling to get enough cars on the road to meet demand. On Wednesday morning, it imposed a special “surge” fee — a rate of at least double the normal fare. Several New Yorkers didn’t take the price hike lightly. They complained on Twitter.... Travis Kalanick, Uber’s chief executive, said in an interview that the higher fee was necessary to give more drivers an incentive to get onto storm-ravaged roads and squeeze through traffic to pick up people for rides

QuestionIn general, are consumers better or worse off with surge pricing, as compared to the case without surge pricing? Consider two different types of consumers: (i) the group of consumers who would have gotten an Uber ride without surge pricing; and (ii) the group of consumers who can only get an Uber ride with surge pricing, but not without. How does surge pricing affect the welfare of these two groups of consumers? Explain using the demand/supply model with diagrams

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Explanation / Answer

In general, are consumers better off with surge pricing, as compared to the case without surge pricing due to lesser prices charged.

i) The consumer getting an Uber ride without surge ricing are paying lesser for the same facility they are availing compared to those who are using Uber with surge fare. The pricing would affect them adversely as they were availing the same service without additional price.Hence due to increasing utility of the same service due to storm-ravaged roads, the  consumers who would have gotten an Uber ride without surge pricing would suffer and their consumer surplus would be minimised as per demand-supply theory.

ii) In this case the group of consumers who can only get an Uber ride with surge pricing, but not without would not be worse off due to their present utility which is with the surge pricing. Their present consumer surplus would not be minimised as the consumer is already at the surge pricing.

From Pareto optimality point of view, in case (ii), the situation of surge pricing will not worse off the position of the consumer, hence Uber is getting the benefits / revenue without harming this set of customers. This would be an inefficiency of the market wheras the other set of customers would be worse off when surge pricing in on resulting in the first case a pareto optimal case.

The price hike and its demand effect can be explained in a normal demand supply curve with quantity of available vehicle at x axis and pricing at y.

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