Price hikes in ride-sharing cab services during peak use times, such as holidays, may actually benefit both drivers and consumers in the long run, a new study suggests. Researchers from Washington University in the US used analytical modelling to study surge pricing and its effects. Their results demonstrate that consumers can benefit from surge pricing.Read more ↓
They found this is the case when a market is not fully served by traditional taxis when demand is high. This result might seem counterintuitive for the consumer shelling out infrequent but frustrating fee increases. Around peak use times many people will arrange safe, sober rides utilising services such as Uber.
“We wanted to understand how Uber uses prices that vary with demand,” said Kaitlin Daniels, assistant professor at Washington University. “Since drivers decide for themselves when they drive, price in this setting influences not only the firm’s margin but also the number of drivers out on the road serving customers,” said Daniels.
Daniels said it is important to keep the big picture in mind.
“Because taxis charge fares that are independent of demand for rides, they experience one of two possible inefficiencies,” said Daniels. “Either taxis fail to satisfy peak demand, or many taxis idle during times of normal demand. Drivers can only tolerate so much idleness because they are paid per ride, so in many cases taxis opt for the former inefficiency over the latter,” Daniels added.
“In this case, surge pricing allows service to expand during peak demand without creating idleness for drivers during normal demand,” she said. “This means that more peak demand customers get rides, albeit at a higher price. This also means that the price during normal demand settings drops, allowing more customers service at these normal demand times,” she added.
The net effect of the expansion of service – the increase of the peak price, and the decrease of the regular price for consumers – is positive, the researchers said. “The bottom line is, if on New Year’s you can’t find a cab and get stuck with a huge surge, don’t resolve to boycott services including Uber. Instead, take advantage of their low base price for everyday use, and in the end you should come out ahead,” Daniels added. The study was published in the journal Manufacturing and Service Operations Management.
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