Uber and Lyft ride-hailing marketplaces use dynamic pricing, often called surge, to balance the supply of available drivers with the demand for rides. We study pricing mechanisms for such marketplaces from the perspective of drivers, presenting the theoretical foundation that has informed the design of Uber’s new additive driver surge mechanism. We present a dynamic stochastic model to capture the impact of surge pricing on driver earnings and their strategies to maximize such earnings. In this setting, some time periods (surge) are more valuable than others (non-surge), and so trips of different time lengths vary in the opportunity cost they impose on drivers. First, we show that multiplicative surge, historically the standard on ride-hailing platforms, is not incentive compatible in a dynamic setting. We then propose a structured, incentive-compatible pricing mechanism. This closed-form mechanism has a simple form, and is well-approximated by Uber’s new additive surge mechanism.
Hamid Nazerzadeh, Nikhil Garg
Economics and Market Design