Friday, January 31, 2014

Uber Car Service Pricing

Uber is a car-for-hire service that uses "an algorithm" to determine the price they will charge for this service.  Recently Uber's CEO explains "surge pricing" as reported by Wired magazine.  Here is the main point:  "To understand the economics of surge pricing from Uber’s point of view, think of drivers as supply and riders as demand. Especially in bad weather, demand goes up: Would-be passengers don’t want to be out in the snow and rain. Meanwhile, supply goes down: Drivers don’t want to be out in the snow and rain, either.  In that scenario, higher prices are meant to accomplish two things. First, by offering drivers more money, it gives them more incentive to get out on the streets — at least in theory — thereby increasing supply. Second, higher fares price out some riders, and demand goes down. Calibrating supply, demand, and price to get the most people the most rides for the least money is the math problem that Kalanick says Uber is always trying to solve."

This is exactly the demand and supply model explained using the concepts of supply and demand.

UPDATE (2/15/14):  Uber cuts prices in 16 cities.  Why?  Supply and Demand.

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