Ride-share company Uber alienates core demographic: Economists

Uber must be very confident in its continued growth. Because it has just alienated its early adopter crowd in order to appeal to the mass-market.

Uber functions a bit like AirBnB but matching passengers with cars. It’s an app uses limo drivers and non-professional drivers to increase supply at reasonable prices.

To say it has been successful is an understatement. A recent funding round valued it at $18 billion. 

But Uber’s PR strategy has been an unusual one. It has gone out of its way to appeal to economists. 

Traditionally, taxis charge the same fare no matter how many people are in the taxi rank. The whole industry is a byzantine mess of regulations. But Uber is much less regulated and has a wholly variable pricing model.

DSC01149
Taxis are sheltered by regulations

Uber prices go up when demand is high. It charged one customer $82 for a one-mile journey at 1.50am on New Years’ Eve.

The wildly variable prices should help get cars on the road when they are needed, and make sure people who really need a ride (about to miss a flight, on way to hospital) get a car ahead of those simply heading into town to window shop.

uber1
A high-price sort of time.

They also worked as a terrific PR boost. Every economics blogger and every financial newspaper there is has been writing excitedly about Uber for years. (1, 2, 3).

That may have been a side-effect of a revenue maximising strategy, but it worked very effectively. Uber’s aggressive expansion into a whole lot of markets has been welcomed – a lot of regulators, political advisors and decision-makers *are* economists.

But now, surge pricing is done. After a whole lot of complaints, New York City has forced Uber’s hand, and it has got rid of surge pricing during emergencies  (e.g a blizzard) across America.

Is this rational?

It might be. Uber’s market is not economics graduates, it’s humans. And humans love what they see as fair. To defend fair, they are not afraid to cut off their nose, seemingly to spite their face.

I’ve written before about how people will hurt themselves to teach other people a lesson. This can explain why people shop around for bargains. Even if we spend more on petrol going to the cheaper shop, it can be satisfying to deny a profiteer our business.

Surge-pricing was seen as unfair. Killing it is a sign of Uber’s expansion.

It is now in the business of appealing to people whose interactions with markets are shaped by their own feelings, not the things they learned in economics class. It is time to take complaints about surge pricing (“price-gouging”) seriously.

(If you’ve made it this far, you’ll probably love this piece at Noahpinion on how complaining about price gouging is a legitimate strategy for signalling the shape of the demand curve away from the familiar parts that normally form equilibirium.)

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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