When prices vary in a programmed way on the basis of time, demand, or resource scarcity, this is typically done in the form of a rebate or discount factor: the high price is taken as a reference, and the price is formulated as some percentage down that high price, so that the customer experiences the pleasant feeling of paying something less than otherwise. This is exactly the opposite of what happens with surge pricing, where the bottom price is the reference, and prices are advertised as a multiple of the reference value. And surge pricing is the method chosen at Uber, the transportation network company. Prof. Garrett van Ryzin, currently on leave from Columbia University to serve as the Head of Dynamic Pricing Research at Uber Technologies, gave some insight into Uber practices at his talk on Data and Surge Pricing at Uber , delivered at the Imperial College Data Science Institute last February. As he pointed out, in Uber's view such an unorthodox pricing algorithm, which is driven by the imbalance between strong demand and weak supply, is considered indeed as a way to shape demand and correct the imbalance: customers will refrain to go for a taxi, while Uber drivers will flock towards surge pricing areas. Some interesting snapshots of surge pricing in action can be seen in the paper by Hall, Kendrick, and Nosko. The method seems to work, though it has spurred a lot of criticisms among angry customers, as can be read in this WSJ article.
Surge pricing (at Uber)
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