Why economists love surge pricing – and why you should, too!

| March 9, 2018

Talk of an Uber-tax and banning Uber drivers from the new Perth stadium is part of a fight between vested interests and disruptive business models.

At its core, Uber is the application of economic concepts to new locational-based technologies and cashless payment systems. One of its features, known as Surge Pricing, serves as a signal to both drivers and customers about scarcity and matches the demand and supply curve in real time.

This feature is despised by some people, who feel it is unfair. The reality is that it involves a voluntary exchange and settles on a market rate which allocates scarce resources — transport services at peak times — to people seeking to get from A to B.

Allocation of a service determined by price is seen as somehow different to allocation based on time spent in a queue. There is an allocative process in both cases. Why is a price signal somehow less virtuous than a time signal? For those who remember the challenge of getting a taxi on New Year’s Eve or after a derby, this trade-off between waiting time and willingness to pay will be understood.

The opposite of surge pricing is discounting. Reducing prices during slow periods is a common tool for those providing services. Think of discount movie matinees or cheap red-eye flights. The Western Australian government even does this for seniors in the middle of the day with free public transport. In industry this is referred to as load shifting.

With new technology, there is much more ability to price differentiate, be it through discounts or surge pricing. This should be celebrated as a good thing. Markets will naturally cater to people across the cost curve. When governments interfere, they inevitably hurt the poorest the most.

The introduction is of Fuel Watch is a case in point. By smoothing the traditional price cycle of fuel sold at service stations, the government effectively eliminated the peaks as well as the troughs. Long queues for cheap fuel means that some people valued a variance in prices and were willing to spend the time to get the benefit of a cheaper product.

Political interference and government involvement in markets inevitably create inefficiencies and customers receive a substandard service. To get a practical insight about this, ask someone over 40 about the responsiveness of Telecom repairmen to a fixing a fault.

While previous governments created an effective property right with taxi plates, the McGowan Government is now responsible for dealing with these legacy issues. It is not their fault, but it is not possible to continually defer a resolution.

However, the funding of the transition payments is secondary to quickly shifting away from the current halfway house. The removal of the Potato Board and compensation did not result in a potato tax. Solutions are possible.

It should be expected that more and more services and goods will be subject to variable pricing. This is best done by the market and private entrepreneurs.

For all of those who want this to be fixed or made “fair” by government intervention, the first question they should be asked is: why do you want to disadvantage the poorest in society who will have to pay higher prices or have less choice because of your demands? We need to stop apologising for markets and the benefits that it provides to all members of society.

Andrew Pickford

Andrew Pickford is the Executive Director of the Mannkal Foundation, an independent economic foundation which encourages the free market system by promoting ideals of voluntary co-operation, choice, personal rights, limited government and responsible resourcefulness of individuals.