Nowadays a large number of companies use dynamic pricing in order to maximize their profits. However, when Uber started to apply dynamic pricing, a lot of people began to criticize the company for unfair and excessive price increases. Surowiecki (2014) states that when the price increases are too high, people find them “psychologically intolerable and unfair”, especially when the prices change sharply due to the sudden shortage of services or products.
Uber’s dynamic pricing strategy differs from the strategies of the other companies, because the prices only rise above the base level and never fall below. Since the customers got used to various kinds of discounts and consider the taxi services as a kind of public utility, they view Uber as a tight-fisted and profit driven company when the prices jump sharply.
Nevertheless, Uber’s dynamic pricing is unique, because it maximizes the profits and increases supply. For example, in Boston the on-the-road supply of drivers increased by 70-80% (Surowiecki) thanks to the unique pricing algorithm used by Uber. When there is a snowfall or a rush hour, not many drives want to work. In order to make them willing to drive, the prices should increase. Uber’s algorithm that sets up prices is based on the highly elastic demand and supply. The higher prices adjust the demand – there are much more drivers, so the people who need to order a taxi will be able to do it no matter what the weather or other conditions are.
When there was a snowstorm in New York in 2013, the prices set up by Uber increased eightfold. Such a sharp price increase caused much criticism in the public and media. Though in terms of economics, it was the right step to do in order to adjust the market equilibrium and avoid the shortage of taxis. Otherwise, if the prices had been lower, fewer people would have been able to order a taxi.
References
Surowiecki, J. (19 August 2014). In Praise of Efficient Price Gouging. MIT Technology
Review. Retrieved from http://www.technologyreview.com/review/529961/in-praise-
of-efficient-price-gouging/
