It’s nearly New Year’s Eve, and Uber will face the music on surge pricing again

New Year’s Eve is coming, and that means a surge of debate about the jacked-up surge pricing charged during high-demand periods by Uber, the leading online ride-hailing service.

(Uber has helped launch the discussion by reminding customers in advance that they’ll pay more for New Year’s Eve rides, and even advising them how to schedule a cheaper trip.)

If experience serves, much of the discussion about surge pricing will be wrongheaded. So let’s examine the issues. In the process we may notice that, even at normal rates, Uber appears to be massively profiteering from its modest services.

To begin with, there are different categories of surge pricing. There’s the variety Uber charges during predictable high-demand periods, such as New Year’s Eve. Then there’s what happened during the hostage standoff in Sydney, Australia, on Dec. 15: Uber quadrupled the fare for people trying to escape the downtown area, with a minimum fee of $100 Australian. Outrage ensued, and the firm hastily changed course by offering free rides out of the crisis zone.

These are two very different scenarios. Inflated pricing is more acceptable in the first than the second, though only within reasonable bounds.

But in the aftermath of Sydney, many commentators conflated the two as if they were the same. Among them was Olivia Nuzzi of the Daily Beast, who decided to take an Ayn Randian approach by arguing that if you don’t like it, lump it. Here’s Nuzzi:

“The fact that Uber allowed surge pricing during a hostage crisis may lead you to believe that the company doesn’t care about you, and you would be correct. But Uber does not have a responsibility to care about you. Uber is not a government entity, and it is not beholden to the general carless public.”

This is dead wrong on several levels. It’s a defense of Uber that Uber wouldn’t dare make. Uber actually spends millions of advertising dollars to communicate that it does care about you--the public benefits of its service are a fundamental part of its pitch for customers and for exemptions from local government regulations. “By choosing Uber instead of drinking and driving, cities are seeing a significant decline in DUIs,” it says on its blog.

As Matt Bruenig of Demos points out in response to Nuzzi, it’s ridiculous to claim that corporations have “no responsibility to act morally.” A corporation like Uber obtains huge benefits from society--including tax breaks and the protection of publicly funded courts and laws. There’s no reason to afford a corporation any of these benefits if it’s going to act entirely in its own interest, and at the expense of members of the public.

Then there’s the question of supply and demand. Nuzzi parrots Uber’s claim that its surge pricing in Sydney was designed to lure more drivers to the crisis zone by offering them higher pay to serve would-be escapees. Bruenig questions whether that works in emergencies, when the target is drivers who aren’t otherwise planning to be on the road, as opposed to holidays, when they may have designed their own work schedules in advance to take advantage of a bonus period. There’s no evidence it does.

Instead, he observes, the Sydney surge would function to maximize Uber’s profit--the firm collects 20% of the driver’s fare, so a higher fare means a larger flow into Uber’s pockets. (At least until Uber decided to pay for the Sydney riders’ fares instead.)

What about New Year’s Eve surge pricing? In a follow-up post, Bruenig observes that the idea that Uber should be allowed to charge whatever the market will bear is undermined by the reality of wealth inequality. It’s one thing to allow supply and demand to set prices when everyone has a roughly equivalent means of paying for a good or service; in that case, every buyer makes an entirely voluntary choice between riding or walking.

But that’s not the case in our unequal society. Because the additional cost is immaterial to some people but insupportable for others, the market doesn’t automatically allocate a variably priced good or service to those with the most urgent need, as it would in an efficient world. Some middle- or low-income riders might need an Uber ride much more desperately than a one-percenter, but it’s simply out of their reach. This is why we don’t allow the market to price essentials like water or electricity--the poor would be driven out of existence. Indeed, one function of regulation is to reduce the cost of some of these essentials to well below their market price, via lifeline rates and subsidies.

The bigger problem faced by Uber and some of its rival services is that drivers may eventually recognize that they’re paying the firms entirely too much for the services they’re getting.

Mike Konczal and Bryce Covert lay this out by exploding the myth that Uber is a paragon of some virtuous “sharing” economy. Instead, they explain, Uber is engaged in “the creation of a low-wage workforce under the ownership of tech companies.”

Uber drivers provide most of the company’s capital assets and labor--they pay for their own cars, maintenance, gas, much of their own insurance, and allow Uber to set the terms and pay of their own employment. Uber’s contribution is a smartphone app and marketing, for which it extracts a rent of 20% of all fares. How valuable is this vigorish? It’s driven Uber to a valuation of $40 billion.

“Given that the workers already own all the capital in the form of their cars,” Konczal and Covert ask, “why aren’t they collecting all the profits?” The solution, they assert, is to reconfigure Uber as a worker collective: “It takes an entrepreneur to start up ride-sharing, but not to run it as a firm.” That can be done by the workers themselves--they don’t need Uber CEO Travis Kalanick to tell them how and when to drive, and since he’s not helping them much with their expense, what is he worth to them?

Indeed, what Uber’s current structure achieves most effectively is cementing its band of executives in place: The firm uses its 20% vig to fight regulations that help preserve competition from taxi fleets, and instill the notion in the public mind that the Uber system is the only possible way to run a ride-sharing service. Kalanick and his Silicon Valley cronies have set themselves up as an elite cadre leading the masses to turn their own brawn into wealth--it’s almost a Leninist system.

“Uber and the rest of the ‘sharing economy’ companies will try to close the door behind them,” Konczal and Covert write, “either by putting their workers in binding contracts or by lobbying government officials to build their own set of industry protections. But a transition to workers’ owning their firms is necessary, economically smart, and one way for workers to gain power in the digital age.” What lies ahead may be a surge of a different kind.

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