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The Latest On Surge Pricing, Now With More Digression Into Income Inequality…

December 16th, 2014 · 15 Comments
Econ 101 · Markets

I’m beginning to think that the overlap in the Venn diagram of “Economic Theory” and “Good PR” is an area that my cat couldn’t resist trying to crawl through due to her obsession with small spaces. Case in point (re the economics, not the cat):

Followed swiftly with the usual mea culpa…

On the plus side, Uber has started explaining the rationale behind the price increases. On the down side, people still hate it. On the…maybe up side, it appears that people may have progressed a bit from kidding themselves into thinking that regular prices and enough available supply is an option and are at least considering the relative suckiness of high prices versus a shortage:

To refresh your memory, the two options, in graph form, are the following:

  • Option A: Normal pricing plus shortage
  • Option B: Surge pricing but no shortage (partially due to increased quantity supplied, partially due to some consumers getting priced out of the market)

If the higher price encourages more drivers to get off the couch (and empirical evidence suggests that it does in the case of Uber drivers- perhaps too well, since I always see drivers swarming around me when surge pricing is in effect), then Option B results in more people being able to flee hostage situations in Australia or whatever. Step 1 is to get people to understand this, but, while it’s a necessary step, it’s such a well-worn topic by economists that I find myself bored by even typing this. So let’s move on to step 2…

Step 2 is to think about fairness, which is a bit of a tricky subject because there’s no objective definition of fair. The tweeter above, for example, seems to think that a lottery system to allocate the cars would be more fair than a price system. On the other hand, suppose that, during this shortage, there’s a pregnant lady that needs to get to the hospital (and yes, there are no ambulances, just go with me here). Would everyone see the lottery system as more fair than a system where pregnant lady could convey that the car is more important to her than it is to other people? After all, that is what prices are supposed to do. But…I’m even half bored having this conversation, since prices as a rationing mechanism is also well-worn and often ignored/rejected territory. Why? Usually because of things like this:

“UBER charge, during a snowstorm (to drop one at Bar Mitzvah and one child at a sleepover.) #OMG #neverforget #neveragain #real” —Jessica Seinfeld

Yup, that’s Jerry’s wife. Which brings us to the thing that doesn’t bore me to tears (yet)…the notion that prices direct goods and services to those who value them the most is implicitly predicated on the assumption that an individual’s willingness to pay is a consistent reflection of how useful a good or service is to that individual. In other words, economists assume that, if person A is wiling to pay more for a good than person B, then that good must me more important/useful to person A than to person B. Using this logic, however, we could probably conclude that Bill Gates likes pretty much everything on earth (with the possible exception of women’s shoes, though I will be the first to admit that I don’t know his life) more than I do. Does he actually get more marginal utility from consumption than I do? Probably not, so the impact that income/wealth has on willingness to pay throws a bit of a monkey wrench into the basic economic analysis.

If we gave everyone the same amount of money and then conducted an auction for an Uber, I would be pretty confident that the Uber would go to the person who truly valued it the most, and I guess my optimistic step 3 would be to get people to accept that mostly hypothetical principle and stop assuming that price increases always make rich people hoard all of the cool stuff. (Though I do like to picture Warren Buffett going around and buying up all the $20 gas after hurricanes and laughing maniacally while doing so BECAUSE HE CAN.) In return, I will distance myself a bit from Econ 101 and acknowledge that, the more income/wealth equality exists in a market, the less likely the system of rationing via prices is to be either truly efficient or fair. Unfortunately, I don’t know where to go from there, since it’s unclear what a more optimal system would look like- a had a student once who suggested that everyone should write an essay about why they wanted a good so that a social planner could go through and decide which consumers got priority, but the transaction costs of such a system seem likely to outweigh the potential benefits.

Tags: Econ 101 · Markets

15 responses so far ↓

  • 1 BZ // Dec 16, 2014 at 8:08 pm

    Loved this post so much I cried for joy, a little. That said, on the very last sentence — it wouldn’t just be the transaction costs, you’d have signaling problems also. Nothing shows preference better than revealed preference — IOW, actions speak louder (and more accurately) than words, when it comes to preferences.

  • 2 Ian Sturdy // Dec 16, 2014 at 8:08 pm

    I have often wondered about that issue. Part of it, I think, can be addressed by tracing income inequality to its sources–in a hypothetical world in which everyone has equal opportunities and talents but different preferences, income inequality will remain but will reflect people’s marginal utility of leisure vs. their marginal utility of money (which is really the marginal utility of things that can be bought with money, such as Uber rides). So the Uber rides may not go to the people who value them the most, but the people who do not get them despite a high valuation are compensated by getting something else (either leisure or other goods) that they prefer. (And if we give them both the Uber rides and the other goods, we create a utility monster problem–strict utilitarianism is not, I think, egalitarian in the face of preference differences.) But I am less satisfied with the result of further relaxing the assumptions—from a distributional standpoint, it seems less just to base differences on talent or opportunity.

  • 3 bipolarboyboston // Dec 17, 2014 at 2:07 am

    As a bridge between option A & B, maybe UBER can incentivize drivers to drive more during emergencies with a lottery, the greater the number of completed fares from the city (or another algo) enters a greater number of entries for a prize or another incentive.

  • 4 Meh // Dec 17, 2014 at 7:32 am

    While I personally find Uber rather coarse, and would never wish to be an apologist for them, I don’t quite understand the fuss. It’s not as if Uber are a monopoly provider of services. No one obliges anyone to pay their, or anyone elses, fares. Their algo can respond to surge by “asking” all they want, but their service is easily reproducible, and hardly unique – whatever the hype. They can ask $400, but that doesn’t mean they’ll get it. And anyway, surely, someone will devise a BB-like app for clearing the true market. Can you imagine using technology to mobilize the full power of potential supply? How many people would get out of bed in their pajamas for a 1/4 such headline surge prices? Worrying about whether Mrs Seinfeld pays over the odds for an Uber car, a bogus Lafite or a piece of counterfit modern art is of no matter to the public interest.

    What should perhaps deserve more fairness or equality scrutiny (as you highlight) are regressive pricing for public-goods, (or fines) such as paying to queue-jump security at airports, traffic & speeding fines. The philosophical argument for priority access (e.g. bus or 1st class) here is dubious or as is regressiveness in penalties meant to deter infractions. Here, applying fines as a % of income or wealth is far more equitable and fit-for-purpose.

  • 5 William Meyer // Dec 17, 2014 at 9:09 am

    Like most economic thinking this post has a hard time when it starts looking at the “political” aspects of economic arrangements. It prefers to consider money in the context of rational market-based allocations, and admits (virtuously) to having a hard time discussing “fairness” issues that arise with such allocations when the parties have markedly different resources with which to bid on services like Uber. I would point out that this type of problem crops up regularly when discussing unequal endowments but has generally been suppressed or simply ignored in neo-classical economics, which is supposed to be value neutral and technocratic. This resolute desire to discuss economics as if it is all about mutual arrangements to improve everyone’s life, rather than focusing on the coercive/political elements inherent in economic life has the effect of converting economics into a giant apology for contemporary power relationships. I mean, goodness, is it really hard to see that forcing people into a monetized economy when most are born with no endowment of money or productive assets is simply a forced-work scheme designed to benefit those with substantial financial resources? I mean, if you start looking at private property generally and the obligation to pay taxes in currency without wearing neoclassical spectacles you begin to see coercion–that is, men with guns–everywhere as the true dominant if underlying characteristic of the market economy. Now the current arrangements have worked out better than the previous forced work regimes, e.g. Feudalism, classical slavery, etc., but more candor about such things might allow us to think about even better arrangements still. It is not like anyone can’t see the defects of the current system with even one eye open.

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    “in a hypothetical world in which everyone has equal opportunities and talents but different preferences, ”

    How can anyone type this with a straight face?

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