How much surge is too much surge?

I had gone for a wedding in far-off Yelahanka and hailed an Uber on the way back. The driver was bragging about how it’s easy to find an Uber at any time anywhere in Bangalore, when I pointed out to him that earlier in the evening when I was on my way to the wedding I’d failed to find one, and had taken an Ola instead.

He was surprised that an Uber wasn’t available in Jayanagar when I told him that there were cars available but at a 1.7X surge, and given the distance I was to travel I found it more economical to take an Ola which was offering a ride at a flat Rs. 50 premium. To this, the driver said that he had also noticed that demand sharply dropped off once the level of surge went beyond 1.5X, and at such surges supply would easily outstrip demand.

Now I’m no fan of Ola’s pricing – I think the flat Rs. 50 premium during peak hours is unscientific, but I wonder if the level of Uber’s surges makes sense. From a pure microeconomic standpoint, it is easy to see where Uber is coming from – raise price until quantity demanded matches quantity supplied and let the market clear. The question, however, is if this kind of a surge makes sense from a behavioural standpoint.

The point is that the “base fare” (“1X”) is “anchored” in the customer’s mind, and thus any decision he takes in terms of willingness to pay is made keeping this “anchor” in mind. And when the quoted price moves too far from the anchor (beyond 1.5X, say), the customer deems that it is “too expensive”, and decides that waiting for a few minutes for fares to drop (or using a competing app) is superior to paying the massive premium.

I suppose that Uber would have noticed this. That there is a “cliff” surge price beyond which there is a massive drop off in volume of matchings. The problem is that if they restrict their surges to this “cliff value” they might be leaving money on the table by not being able to match the market. On the other side, though, if the surge is so high that the volume of transactions drops sharply, it results in much lower commissions for Uber! I’m assuming that a solution to this problem is on the way!

And I’ve found that it’s always harder to find a taxi on a Sunday. The problem is that because demand is lower, supply is also lower (this is a unique characteristic of “two-sided markets”) because of which the chances of finding a match are harder, and transaction costs are higher. I wonder if it makes sense for taxi aggregators to levy a “Sunday premium” (perhaps with Uber holding a day-long minimum of 1.2X surge or something) to compensate for this lack of liquidity!

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