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Uber’s Prices Are Both Too Low AND Too High (Apparently)

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As noted in this earlier post [2], Douglas Rushkoff (in Throwing Rocks at the Google Bus [3]) argues that Uber, despite the fact that its business is based on the use of modern digital technology, is really nothing more than an old-fashioned, worker- and consumer-exploiting monopolist-in-the-making.  Among the means that Uber uses to achieve its monopoly is, according to Rushkoff, predatory pricing (“the same way Walmart undercuts local retailers” [p. 47]).  But in addition to charging prices that are too low, Uber also – in Rushkoff’s telling – also charges prices that are too high:

Unlike traditional, regulated livery services, Uber is under no obligation to the public good, freeing the company to implement “surge pricing” during peak use periods, as it did during Hurricane Sandy and other disasters – a practice indistinguishable from price gouging [p. 86].

It’s true that a firm that practices predatory pricing might nevertheless raise prices when demand for its services increases, and that these higher prices might still be predatory according to the conventional (if, in my opinion, completely meaningless and mistaken) definition of predatory pricing [4] (that is, depending, P<MC or P<AVC).*  But if and to the extent that Uber is a predatory pricer, then the complaints about Uber’s prices during peak periods should not focus on the fact that these prices are higher than during non-peak periods but, rather, on the alleged fact that these prices haven’t risen high enough during peak periods!

It’s very difficult to square Rushkoff’s assertion on page 47 that Uber is a predatory pricer (that is, that Uber charges unjustifiably low prices) with his complaint on page 86 that Uber is a ‘price gouger’ (that is, that when market conditions permit, Uber charges unjustifiably high prices).

More generally, Rushkoff’s complaint about surge pricing is simply another revelation of his profound economic ignorance.  When demand for a good or service rises relative to its supply, the market value of each unit of that good or service necessarily rises.  This reality is not optional.  The resulting higher monetary price, rather than causing this increased scarcity, reflects it.

In addition to reflecting the current, increased intensity of the scarcity of a good or service, the higher price also (1) informs both existing and potential suppliers of this product’s now-greater relative scarcity; (2) incites both existing and potential suppliers to increase the amounts of time, effort, and resources that they devote to producing and bringing this product to market; (3) informs both existing and potential consumers of this product’s now-greater relative scarcity; and (4) incites both existing and potential consumers to economize further on their use of this product.

The result of the higher price is that suppliers eventually bring more of the product to market and consumers use existing supplies more carefully than they did before the price rose.  Both responses – those of producers and those of consumers – help to diminish the negative effects suffered by flesh-and-blood people from whatever underlying reality caused the demand for this product to rise relative to its supply.

Complaining about so-called “price gouging,” therefore, is akin to complaining about the reflection in a mirror of your blotchy face and unkempt hair.  Not only will destroying or distorting – or bemoaning – the mirror do nothing to change the reality that your face is blotchy and your hair unkempt, it will fail to give you accurate information about the state of your face and hair.  It will also diminish your capacity to take whatever are the best steps to rid your face of blotches and to make your hair more attractive.

In short, Uber’s surge pricing is strong evidence that Uber serves the public interest rather than, as Rushkoff believes, undermines it.  Yet because Rushkoff has no earthly idea of the determinants of, or of the role of, market prices, he blames the symptom (rising prices) for causing the underlying malady (increased scarcity).  Rushkoff therefore mistakenly concludes that masking the symptom will cure the underlying malady.

UPDATE: The Economist just now offered this nice essay on surge pricing [5].  A slice:

Yet surge fares also demonstrate the elegance with which prices moderate a marketplace. When demand in an area spikes and the waiting time for a car rises, surge pricing kicks in; users requesting cars are informed that the fare will be a multiple of the normal rate. As the multiple rises, the market goes to work. Higher fares ration available cars by willingness to pay: to richer users, in some cases, but also to those less able to wait out the surge period or with fewer good alternatives. Charging extra to those without good alternatives sounds like gouging, yet without surge pricing such riders would be less likely to get a ride at all, since there would be no incentive for all the other people requesting cars to drop out. Surge pricing also boosts supply, at least locally. The extra money is shared with drivers, who therefore have an incentive to travel to areas with high demand to help relieve the crush.

……

* MC is the acronym for “marginal cost” (which is the change in the producer’s total costs when its output changes by one unit).  AVC is the acronym for “average variable cost” (which is the sum of the producer’s variable costs divided by the number of units of output it produces; variable costs include all costs save those that are “fixed” – i.e., cannot be varied – during the time horizon under consideration).

By the way, if economists and antitrust scholars had read and absorbed the lesson of Armen Alchian’s sorely neglected 1959 article “Costs and Outputs [6],” the very concept of below-cost pricing would have been seen for nearly 60 years now as being completely meaningless.

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