During last week’s armed siege of a cafe in Sydney, Australia, taxi company Uber was condemned by the world’s media for “price-gouging” after it quadrupled its minimum fare for rides in the area. This criticism was wrong-headed and unjustified. Furthermore, if such public scoldings discourage Uber from implementing surge pricing in the future, or worse still encourage governments to regulate it to the same end, then Uber’s power to get drivers on the road will be severely limited, which can only leave us worse off should something terrible like this happen again.
Imagine you’re a Uber driver in the Sydney area on that fateful Monday morning. You look at your phone and see that the current minimum fare is the usual $25, which ordinarily would be enough to get you to log on and go out on a few pick-ups, but today is different. You got to bed late last night and at this point in time would rather have a few hours more sleep than an extra $30 or so in your pocket. You go back to sleep and Uber doesn’t have one more driver currently available for its customers.
An hour later your phone buzzes and you see that surge pricing has been implemented and that the minimum fare has gone up to $100. You’ve never seen it so high. That’s four times what you can normally earn at this time of day, which you decide is definitely worth getting out of bed for. You get dressed and log on. Immediately there’s more requests coming through than you’ve ever seen before. At this rate it’ll be worth doing a few more hours than usual. The thought occurs to you that if you do, then you’ll be able to afford to buy that tablet your little brother wants for his birthday. Brilliant.
You turn the TV on and see that there’s a hostage situation at a cafe in the central business district and realise that this is why there’s a surge in demand for Uber taxis. This new and rather shocking information makes you stop and re-evaluate your decision. Is it safe to drive down there? It could be dangerous. Is it worth it? You imagine the look on your little brother’s face as he opens his present from you and decide that you’ll take the risk, however great it is, but only because you’ll be earning four times more than usual. Opportunities to earn this much don’t come along often and you’re certain that you will regret it if you do not take advantage of it. You accept the first pick-up request in the list, pick up your car keys and head out the door.
Somewhere in an office building near the under siege cafe a secretary and two of her colleagues breathe a collective sigh of relief when they see that a Uber driver is on their way to pick them up. They call their loved ones to say they’ve got a Uber cab and will be out of there soon. Multiply this same scenario by many times, but with differing particulars for each and every driver and rider, and we get a good sense of the positive impact of Uber’s surge-pricing policy.
If Uber hadn’t implemented surge-pricing, then all those drivers for whom, according to their own valuations, it was not worth dropping whatever they were doing for anything less than a fourfold increase in earnings capacity would not have done so and an increased demand would not have been matched by an increased supply.
In other words a shortage would have resulted and many people in the siege area would have been left disappointed or angry that Uber couldn’t give them a driver when they really, really wanted one. The media would then publicise these people’s’ complaints of poor service and abandonment by Uber, and it would find itself being condemned as incompetent by the media instead of unscrupulous. Either way the calls for government to ‘step in’ and address these ‘market failures’ would be deafening. Uber is damned if it does and damned if it doesn’t. It can’t win.
This kind of public shaming of companies like Uber is great for selling newspapers, but it creates a threat to our own liberty because situations such as the Sydney siege appear to be strong arguments for using government force to remove certain freedoms in certain circumstances; in this case the freedom for a company to set the price of its own service at all times. It conjures up that alluring idea that government force can be precisely injected into to society in order to ‘tweak’ it for the better.
Some governments have already applied pressure to Uber’s neck. In the aftermath of hurricane Sandy in the U.S. in 2012, New York Attorney General Eric Schneiderman claimed that Uber’s pricing policy violated a 1979 anti-price gouging law. Shortly afterwards the Attorney General and Uber reportedly came to an ‘agreement’ about price rise capping – even in states where such laws do not exist. This threatening behaviour by government towards Uber will almost certainly mean that during the next natural disaster there will be less Uber drivers available than there otherwise would have been. If that ends up harming people in need, then you can be sure politicians will be shouting for Uber’s head.
According to the Washington Post, Uber “backtracked” an hour after introducing the surge-pricing in Sydney that day and then announced they would be offering free rides, and even refunds to those who had paid the higher fare. This would certainly have pleased those customers who weren’t prepared to pay the $100 minimum fare, but the crucial question is: did this actually result in more people being picked up in less time than would otherwise have been the case? This was, after all, the outcome desired by everyone caught up in the situation and their loved ones.
If Uber agreed to pay drivers in the area the surge-price rate for pick-ups from the siege zone, even though customers were paying nothing, then it was probably able to get enough drivers on the road to meet demand. Whether the company absorbed the losses itself or passed all or some of them onto its drivers isn’t known. If it was the latter, then this could discourage drivers from making themselves available under similar circumstances in the future.
If, however, Uber didn’t retain the greater financial incentive to its drivers, one way or another, then it would have had to rely solely on their compassion and moral courage to increase the supply of its available drivers. I’ve no doubt that there were a number of Uber drivers on that fateful day who were prompted to act by nothing more than a sense of moral duty after learning what was happening down town, but no doubt there were some too who decided the risk, which no one could quantify at the time, to be too great when thinking of the potential consequences to themselves or their families should the worst happen.
There’s nothing foolish about relying on our sense of compassion towards each other, we do it every day without thinking about it, but it’s equally as wise to recognise that all human beings act primarily out of self-interest, in the purest sense of the term, which is why it makes good sense for Uber to increase its minimum fare during emergency situations such as the one in Sydney.
Raising that minimum fare increases the gain for each Uber driver to log on and make him or herself available. If this gain is sufficient to make it the most profitable (in the broadest sense of the word) course of action amongst all possibilities for the individual at that moment, then it rises to the top of the order in their mind and becomes his or her chosen course of action. The larger the minimum fare increase the more likely it is to become any given Uber driver’s most profitable course of action, and the more likely he or she is to drop what they’re doing and grab the car keys.
There is one question that the media and all those who accuse Uber of being greedy money-grabbers cannot answer. If Uber’s primary motive for raising its minimum fares is to maximise profit, then why didn’t it raise its minimum fare even higher than it did during the Sydney siege? After all, it had a group of people entirely at its mercy and could have increased its minimum fare to $1000. Indeed, there was nothing to stop management at Uber Sydney from doing just that. So why didn’t they?
The reason is that the value of Uber’s service, at any given moment, is ultimately constrained by its customers – the very people who assign it any value at all. When Uber raises its minimum fare it aims to find the lowest rate which will encourage most drivers to make themselves available but which at the same time doesn’t go beyond that which most of its customers are willing to pay. If it goes beyond that limit then demand will drop right off, and that’s a disaster. Thus it is a balancing act. I don’t know how Uber’s system works exactly, but I guess that it has an algorithm that derives a minimum price figure based on historical and real-time data. Evidently, though, human beings in virtual HQ can override these figures at any time and, I guess, the whole system adjusts accordingly.
What should concern us about the public criticism that Uber has had at the hands of the media and politicians in the wake of Hurricane Sandy and now the Sydney siege is what effect this will have on Uber’s behaviour in the future. If Uber becomes increasingly reluctant to raise its minimum fare to meet surges in demand whenever they occur, or is prevented from doing so by government, then the quality of its service must inevitably suffer, and people will have less incentive to become Uber drivers.
It’s not impossible that we could kill Uber off and destroy a very good thing by strangling it to death through law and regulation. This would certainly please the deeply entrenched taxi monopolies of the world’s major cities who leverage State powers to maintain their unjust economic positions over us, and which all hate Uber because it exposes them for the rackets that they are, but the last thing we want to do is make life easier for those groups who benefit directly at our expense by virtue of government force.
If we lose Uber then we lose more than an innovative, good quality and cheap taxi service, we lose a role model too. In his recent rebuttal to a Wall Street Journal editorial piece, economics lecturer at Towson university, Howard Baetjer Jr, wrote:
“…one of the coolest things about Uber is that they didn’t ask permission. Bravo, Uber! That’s the kind of subversion of impertinent abusive government regulation we need more of. Why should Americans, or anybody, have to ask permission to engage in voluntary, peaceful exchange?”
Howard makes a salient point. Why should you, I or anyone have to ask permission to engage in voluntary, peaceful exchange? Uber didn’t, which is actually a brave thing to do in this age of increasing government control over private economic exchanges throughout the western world. By not asking permission the owners of Uber asserted their right to person and property. They rejected the notion that government has the moral right to control their peaceful actions. Uber’s very active marketing team says a lot, but the way in which Uber came into being has already spoken volumes.
Ultimately, Uber did what all companies must do and adjusted its behaviour to please its customers. Even though this probably resulted in less drivers being available to meet demand than if they had stuck with the higher surge-price minimum fare. People in the siege area probably ended up waiting longer for a pick-up too, but it seems some of them preferred that to paying at least $100 to get out of there more quickly.
This economic exchange between Uber and its customers in the siege area was in effect a process of negotiation. Uber’s management responded in real-time (via social media) to the demand for its services and the feedback it was receiving from its customers (again via social media). The fluctuations in the minimum fare that happened throughout that Monday morning – from $100 to zero – reflected Uber’s attempts to align itself with its customers demands. And that’s really the point. Not only is it Uber’s moral right to decide the upper limit on the price of its own service, there is no other person or agency in society, not even government, better placed to make that decision.