Ride-hailing apps usually match more efficiently than taxis, but they can enter a failure mode anticipated by Arnott (1996) that we call wild goose chases. High demand depletes the platform of idle drivers, so cars must be sent to pick up distant customers. Time wasted on pick-ups decreases drivers’ earnings, leading to exit and exacerbating the problem. Raising prices, either by keeping them consistently high or “surge” pricing only at high demand times, brings demand back under control and avoids these catastrophic failures. Banning surge pricing would thus likely result in always-high prices. Alternative solutions would undermine ride-hailing’s brand promise.
Juan Camilo Castillo, Dan Knoepfle, E. Glen Weyl
ACM EC 2018
Economics and Market Design