Surge pricing is essential to the proper functioning and health of a dispatch ride-hailing system. When drivers get scarce relative to demand, more time tends to be spent en-route to pick up riders, driving down the efficiency of the entire system. This means that riders and drivers are aligned in their interests: both sides of the market want prices to be higher to avoid these situations, because these “wild goose chase” scenarios result in fewer trips being provided to riders and lower earnings for drivers. By smoothing out demand, surge pricing protects the health of the market and ensures efficiency and reliability for riders and drivers. In fact, surge is what allows Uber to have low prices most of the time. The paper demonstrates that, if Uber were unable to dynamically surge when needed and instead had to charge a static price, this price would have to be a high price (near the typical surged price).
Juan Camilo Castillo, Dan Knoepfle, E. Glen Weyl
ACM EC 2018
Economics and Market Design