Is $135 for a one-mile taxi ride too much?

January 9th, 2012

That’s how much the ride costs in NYC on New Years Eve as a result of Uber’s dynamic pricing. People, who are used to fixed prices, are pissed.

On New Year’s Eve, Dan Whaley, a tech entrepreneur in San Francisco, got into a black Town Car and was driven one mile to a holiday party. The ride cost him $27. At the end of the night out, Mr. Whaley took a Town Car home from the party. This time, the exact same ride cost $135.

Mr. Whaley was using Uber, a service that allows people to order livery cabs through a smartphone application. On New Year’s Eve, Uber, a start-up in the city, adopted a feature it called “surge pricing,” which increases the price of rides as more people request them.

Although New Year’s Eve was very profitable for Uber, customers were not happy. Many felt the pricing was exorbitant and they took to Twitter and the Web to complain. Some people said that at certain times in the evening, rides had spiked to as high as seven times the usual price, and they called it highway robbery. Uber’s goal is to make the experience as simple as possible, so customers are not shown their fare until the end of the ride, when it is automatically charged to their credit card.

Economists call this “dynamic pricing.” It is deployed by only a small number of businesses, like hotels, airlines and car rental companies, which raise prices on weekends and holidays when demand surges.

I like dynamic pricing. It is supply and demand in reality, and helps keep prices down under regular circumstances.

“If you’re a pure economist and following the laws of supply and demand, the argument is that if someone is willing to pay a price, then it is not excessive,” said Liran Einav, an associate economics professor at Stanford. “But that all depends on the type of long-term relationship you want to build with your customers.”