Uber Car Service CEO To Customers: High-Priced New Year's Eve Rides Shouldn't Have Been A Surprise

WASHINGTON -- The CEO and co-founder the smartphone app-enabled Uber car service has a message for all those shocked by their expensive rides home on New Year's Eve: Get used to it.

With its app, Uber lets you arrange pick-ups in fancy black sedans. It's supposed to be more stylish, comfortable and convenient than conventional taxis. The service arrived in D.C. in December and is also available in New York, Chicago and San Francisco.

On New Year's Eve, Uber instituted a "surge pricing" system that was designed to keep cars available for the customers who really, really wanted them, by raising prices as demand grew.

But prices went higher than expected for some customers. In D.C., Mark Krieger used the Twitter hashtag #happynewtears to describe his surprise $200 Uber ride on Saturday night.

Uber's CEO and co-founder, Travis Kalanick, is unrepentant.

He contends that the surprise cost shouldn't have been a surprise. Before New Year's Eve, he blogged about surge pricing, he emailed customers about the pricing as far back as October. And on New Year's Eve, customers had to click through a screen informing them that their price would be as much as six times the normal price when ordering a ride.

Kalanick has made clear he's open to suggestions about how to handle pricing, but also put up a blog post on Tuesday reiterating how Uber's "surge pricing" system works. The post is pretty much an aggravated sounding lesson in economics 101:

Without a surge pricing mechanism, there is no way to clear the market. Fixed or capped pricing, and you have the taxi problem on NYE -- no taxis available with people waiting hours to get a ride or left to stagger home through the streets on a long night out. By *raising* the price you *increase* the number of cars on the road and maximize the number of safe convenient rides. Nobody is required to take an Uber, but having a reliable option is what we're shooting for.

As should come as no surprise, economist-types love Uber. But the company "fails marketing," according to Venture Beat:

Uber's blog post does a reasonable job of explaining the economic theory behind its surge pricing, even providing an illustration of supply and demand curves. From the standpoint of economic theory, it makes perfect sense.

But when people feel ripped off, they don't want to hear about economic theory or the team of Ph.Ds you have developing optimal supply and demand mechanisms.

Most people have a sense of what is "fair". Study after study has shown that people will make suboptimal economic decisions in the name of fairness. Product and pricing decisions have to take that into account.

The National Review got more academic, linking the Uber kerfuffle to economist and former Libertarian North Carolina gubernatorial candidate Michael Munger's work on price gouging -- Munger believes that anti-gouging laws harm consumers by limiting supply:

This minor dust-up serves as a reminder of the embeddedness of economic transactions. People feel as though Uber was taking advantage of them, despite the fact that the service leapt in to fill the void created by an overregulated taxi marketplace. One is reminded of Michael Munger's critique of anti-gouging laws and, more broadly, his work on evolutionary exchange.

Relatedly, Munger links to a really thought-provoking essay by the democratic socialist philosopher Michael Walzer on the ethics of competition -- it is one of the best critiques of market I've ever read, partly because it is so subtle and intelligent. Other critics of the market could learn a thing or two from Walzer. But they probably won't.

Washingtonian Dave Stroup tweeted a slightly more psychological take: "Yup, I like the service a lot; I'd just hate for NYE to be someone's 1st experience and have it be confusing, etc."

Kalanick summed up his own take on the highs and lows of Uber's New Year's Eve emotions and prices in his blog post:

The whole experience was at once exhilarating and a bit defeating. We knew to keep cars available, we had to let the price go where it needed to. But the higher the price, the more vulnerable we were to a customer support nightmare. The communications we sent in preparation were out there, (blogs, tweets, emails, etc.), the pricing notification was there, but people are simply not used to paying a lot of money for a reliable ride during a run on cars.

Kalanick told The Huffington Post in an email that he thinks "folks will get used to 'surge events' on Uber and it won't be newsworthy the next time around."

Flickr photo by Daquella manera,, used under a Creative Commons license.

RELATED VIDEO: An animation short explaining how Uber works.

Comments

[madcityy]

02:55 PM on 01/05/2012

GOOD FOR UUUUUUUUUUUUUUUUUUUUUU,IDIOTSSSSSSSSSSSSSSSSSSSSSS

[happypatb]

08:58 AM on 01/05/2012

Metro has had "peak hours" pricing for years and no one has complained. Tickets to events are also sold this way on the secondary market. Allocating scarce resources by price makes sense for both the seller and buyers (at least those buyers who are willing to pay a little extra to get something they want).

[Rooster Coburn]

08:46 AM on 01/05/2012

Surge pricing makes sense. But to make it fair the drivers of the vehicles (livery persons) should be able to bid on a customer's offer. Customers could broadcast via their smart phone where and when they want to go someplace. The phone's GPS would tell the driver where the customer is now. The customer could enter the maximum price he or she was willing to pay, as well as their maximum acceptable wait time. Drivers would then then bid on the customer's offer, giving their price plus their estimated wait time. Since the system would know where both the driver and customer were it could screen out unreasonably short time offers. Five minutes from Brooklyn to Mid-Town on New Year's Eve would be an unreasonable time estimate for instance.

[Michael Hubble]

08:37 AM on 01/05/2012

This is the first I've heard of this service, and I think what they're doing is great.

LOTS of industries use this pricing model - hotels, airlines, etc. Keeping a flat fee regardless of demand causes shortages - and if the surge pricing is part of the company's business model, I don't think it causes a marketing problem at all.

If you live in DC and want "fair" pricing regardless of demand, then take the Metro.

[HeyJoeHere]

08:15 AM on 01/05/2012

He ought to call it 'greed pricing', where every second of every day is up for bid....

[BlackbirdHighway]

07:42 AM on 01/05/2012

The "free market" will compensate. Next year there will be a lot more people driving drunk. That's an excellent example of why the free market is not the solution to every problem.

[KimDC]

07:26 AM on 01/05/2012

And there will also be people like me, whose first knowledge of this service is an article detailing how they're really effing expensive. When the first impression is "stay away from them!" it doesn't do much for your marketing!