Uber customers frequently complain about surge pricing. On one hand, surge pricing makes sense from a supply and demand standpoint. On the other hand, the prices can be outrageous, with reports that a 20-minute ride can cost $362. From an ethics standpoint, should Uber revamp this model? Or is it OK to continue with surge pricing because they warn customers first?

Submitted by a journalist

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About John Hooker

T. Jerome Holleran Professor of Business Ethics and Social Responsibility Tepper School of Business Carnegie Mellon University

One response »

  1. John Hooker says:

    Uber increases its fares (surge pricing) in periods of high demand, and Lyft uses a similar scheme (“prime time” pricing).

    Surge pricing is a form of price gouging. Price gouging might be defined as charging a very high price when the market supports it due to high demand and limited supply. The issue is whether price gouging is ethical in Uber’s case.

    It is essential to distinguish 2 questions that are often confused:

    (a) Is price gouging unethical?
    (b) Should there be a law against it?

    Free-market advocates typically oppose (b), but this was not the issue posed by the journalist who contacted me. The issue is (a), whether Uber should use surge pricing.

    Uber likes to point out that a surge price increases the supply of drivers, and more people get a ride. This is a utilitarian argument because it defends surge pricing on the grounds that it makes people better off. However, surge pricing means that everyone pays a higher price. This benefits drivers but harms those who can’t afford the price, or would have got a ride under a lower price scheme. The harm may outweigh the benefit.

    A standard textbook argument says that the market price (even when demand drives it up) maximizes “producer and consumer surplus” and therefore maximizes welfare. However, Uber’s price is not really the market price, but a price set by its algorithm. Even if it is the market price, the textbook argument assumes that extra money has equal value to drivers and riders, which is often untrue in exceptional situations. An extra $50 may be of much greater value to a passenger who desperately needs a ride, and can’t afford it, than to a driver.

    So unlimited surge pricing is probably nonutilitarian if used in exceptional situations. One way to recognize an exceptional situation is that demand is driving prices far above normal levels. Surge pricing may be OK from a utilitarian perspective if prices are capped when they begin to rise too high.

    One might argue that surge pricing is unfair even when it is utilitarian. For example, it may violate the famous “difference principle” of John Rawls, which says roughly that one should maximize the welfare of the worst-off.

    The market allocates goods by who pays the price, rather than by who has greater need, who is willing to wait in the queue, or who wins a lottery. The problem is that some people who desperately need a ride may be unable to afford the price. Maybe it’s unfair to allocate rides to those who can afford them rather than those to really need them. If there were a price cap, rides would be allocated partly by queuing. Those who really need a ride may keep trying longer and eventually get a ride, which could be fairer.

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