For those that are unaware of it, Uber is an app that you can download for your phone. Its services are available in 35 countries (and counting). Uber arrived in South Africa in the middle of 2013, and it’s now available in Johannesburg, Durban and Cape Town.

Some people hate it.

So what is it, and why the hate?

Uber is the disruptive technology that is shaking up the taxi industry.

Until Uber arrived, organising a taxi required either standing in line at a taxi rank, or regularly calling the operator over a half hour period while said operator continues to insist that your cab is “5 minutes away”. This is generally followed by harassment from a taxi driver that speaks no English, and reclining in a seat that is the ergonomic version of a trailor park. And smells like one.

Also: there’s never a taxi when you really need a ride. And finally, the price is a variant of the meter, and however the driver has decided to jig it.

When you register with Uber, however, you get the following:

  1. All drivers are Uber-vetted, which requires the driver to pass a test in English.
  2. Each driver’s profile is open to review from the people that use him/her. And when the reviews are bad, Uber drops them.
  3. Your messaging conversation takes place directly with your driver via the app.
  4. The app shows you a map with live tracking of your selected car.
  5. There’s an upfront quoted fare.
  6. And most importantly: surge-pricing.

What is Surge-Pricing?

Surge-pricing is a form of price discrimination, and it addresses the problem of matching demand and supply. For example:

  • During peak times, passengers want rides, and taxi drivers would probably prefer to take a break (I mean – who really wants to sit in traffic, and be abused by passengers complaining about being late and “can’t you just find another route already?” while inching along and being paid per mile).
  • During non-peak times, taxi drivers would quite like to fetch and carry, only no passengers.
  • And during especially peak times, there just aren’t enough taxis to go round.

Which is basically saying that standard demand and supply graph just averages out a general picture of things: which is not all that helpful when you’re the desperate guy at the back of a taxi-rank queue in the middle of a thunderstorm without an umbrella.

And when you think about it, if you were that guy, wouldn’t you rather pay a little more to get out of the rain?

So the Uber app algorithm does something that many people might find unfair. It monitors the passenger and driver numbers, and where there are many passengers with not enough drivers, the price goes up. Often dramatically.

This adjustment is a form of market-clearing, because as the price goes up, so the Uber drivers start to head in the direction of the particular area experiencing high demand, meeting it with higher supply, which then brings the price back down to normal levels.

Some graphs:

surge pricing

Does this make people angry? Well – as a passenger, it does feel a little like you’re being abused in your hour of need. During a snowstorm in December last year, Uber surge pricing pushed New York prices up to $35 per mile, with a $175 minimum fee.

Uber surge pricing

And because your payment takes place via the app, there’s nothing that your cab driver can do to change it…

That said

Most of the time, Uber works out cheaper than your average cab. And if you really dislike surge pricing, no one is stopping you from joining the line at the taxi rank during the snowstorm.

But regardless of your feelings – what I like about surge-pricing is the promise it presents for other areas of consumption. People keep talking about inequality and the macroeconomic problems that are being created by a wealthy upper class that is more inclined to save than it is to spend.

Here’s a thought: the wealthy value convenience and time much more than they value the bank note in their pocket. Why not just charge them more for that convenience wherever possible? They’ll save a little less, and they’ll feel like they’re getting something in return for their spending…

And actually, if anyone with a reasonable car can be an Uber driver, and the demand can be high enough to drive prices up to 7 times the standard fare (and people are apparently willing to pay that!) – well isn’t that such an obvious place for job creation? Nothing creates income equality like giving someone an income.

Just saying.