The Economist has an article about the ride share industry. They pointed out that stock companies engage in price gouging when the demand for their services is high:
This digital twin, one of the most sophisticated of its kind, allows Uber to adjust its operations in real time. Disgruntled riders may think this enables the company’s “surge pricing,” where fares suddenly increase to balance the demand for rides and the supply of drivers. This is partly true. But the immediate and best result is that the digital twin allows for up-to-the-minute route adjustments in ever-changing city traffic.
(Price gouging is generally defined as a situation where companies set prices above the normal level to prevent shortages from occurring.)
The taxi industry provides a good test of the theory that consumers do not like price increases. Before the advent of ride-sharing, NYC’s taxi industry was regulated by the government, which set a standard price. As a result, it was very difficult to get a taxi at peak times, when demand exceeded supply at a regulated price.
Ride share companies have decided to apply higher prices during periods of high demand, to prevent shortages. As you can seehave grown to dominate the NYC taxi market:
It wouldn’t surprise me if polls show that a majority of Americans oppose the price cuts. But economists generally don’t put much weight on the polls; we are more interested in how people behave, that is, theirs expressed preferences. And at least in the NYC taxi market, it seems that buyers prefer fixed pricing over a fixed regulated price.
Another objection is that it is not the increase in price that they like, rather it is the fast and reliable availability of cheap cars. But those are just two sides of the same coin. Variable prices are both a necessary and sufficient condition to ensure that the quantity supplied equals the quantity demanded. You cannot have one without the other. So regardless of what consumers say, it seems that they prefer a government with rising prices to a government with shortages.
PS. After starting this post, I found a Posted by John Cochrane that makes some similar points.
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