Uber got two economics PhDs to explain how supply and demand works

Everyone’s private economist, too.
Everyone’s private economist, too.
Image: AP Photo/Ross D. Franklin
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I do not have the deepest understanding of economics. I have an A-level—rather like a US AP—in the subject, but I haven’t opened an economics textbook in a decade. But I do remember something: The price of a good is determined by how many of them are available, and how many people want them. When the supply is low and demand is high, the price is going to be higher.

Uber today (Sept. 17) published a University of Chicago study it commissioned in which two economics doctorates explain that this is, amazingly, how Uber’s surge pricing structure works. The study shows, in intricate detail, that surge pricing allows for Uber to function, as suppliers (drivers) are enticed by the potential for higher fares, and demanders (riders) will decide if they really want to pay higher prices right that minute. When prices drop back down—as supply increases, or demand falls—the surge ends.

Or, as Uber explained:

When demand for rides outstrips the supply of cars, surge pricing kicks in, increasing the price. You’ll automatically see a “surge” icon next to the products (uberX, UberBLACK, etc.) that are surging. If you still want a ride, Uber shows the surge multiplier and then asks for your consent to that higher price.

Surge pricing has two effects: people who can wait for a ride often decide to wait until the price falls; and drivers who are nearby go to that neighborhood to get the higher fares. As a result, the number of people wanting a ride and the number of available drivers come closer together, bringing wait times back down.

The economists made some great charts to illustrate this point, like this one:

Image for article titled Uber got two economics PhDs to explain how supply and demand works
Image: The Effects of Uber’s Surge Pricing: A Case Study/Hall, et al.

But in reality, this one probably would’ve done the job too:

I commissioned no one to make this chart.
I commissioned no one to make this chart.

In 2014, Uber commissioned a study that showed, as Slate put it, that “Driving for Uber is great,” although that didn’t turn out to be quite so accurate. In this case, however, the study does seem to accurately confirm that Uber’s business does, in fact, marry up with the laws of economics.