After Sydney fare blunder, Uber vows not to be so ‘dumb’
Company agrees to cap rates in some jurisdictions during emergencies
Car-hailing service Uber came under severe criticism during the recent hostage-taking in Australia, when fares surged as much as four times the usual rate as people fled Sydney’s central business district.
The firm, which bills itself as a technology company, blamed the price spike on an algorithm it uses during periods of peak demand to lure more drivers to a particular area. Uber quickly backtracked, promising free rides out of Sydney and offering refunds to those who overpaid.
“We need to be more vigilant to prevent those errors,” said Uber Toronto general manager Ian Black during a recent speech to the Canadian Club. “That can’t happen. That’s a dumb thing.”
Black went on to say that as a technology company with “lots of smart engineers,” there must be a way to respond to crises such as Sydney, or a snowstorm or flooding, to ensure surge pricing doesn’t go into effect.
The company has agreed in some jurisdictions, including New York through a deal with the attorney general’s office, to cap rates during “abnormal disruptions of the market” such as emergencies. Uber faced a huge public outcry during 2012 Superstorm Sandy for surge pricing.
Uber, which now operates in 250 cities around the world, first introduced surge pricing in 2011 on Halloween night as a way to get more drivers to where demand is the greatest. That could include Toronto’s Entertainment District after the bars close on New Year’s Eve.
Uber has even filed an application with the U.S. patent office for its price-surging system, according to Bloomberg.
Jean-Philippe Vergne, assistant professor of strategy at the University of Western Ontario’s Ivey Business School, says the surge-pricing model illustrates a basic concept of microeconomics — how supply and demand work, with price being highly elastic in this case.
Vergne compares it to an auction house, where if more people want a particular piece of art, there will be a flurry of bids and the price will naturally go up.
Another example Vergne gives is the price of a Coca-Cola sold in a vending machine on the beach in the summer. “You could buy a 12-pack at Walmart for the same price,” he said, but people are willing to pay more to enjoy a cold pop on a hot day.
Taxi companies will offer a service at a fixed price, but it may be difficult to catch a cab during peak times, he said.
“Uber is offering reliable service, but the price will be uncertain,” Vergne said. “People are willing to pay more on a Saturday night. There is a market for that.”
But the danger of surge pricing would present itself if Uber wiped out other competition, including taxi companies and rivals such as Lyft and Sidecar. Hailo, a U.K.-based rival, shuttered its Toronto operations this fall.
“If Uber becomes a monopoly, then that would be a tragedy for everyone,” Vergne said.
Uber says the promise of higher earnings draws drivers to a particular area.
In Toronto, there would be a dozen spots carved up and Black insisted the entire city would never be “surging” at the same time. Here, surge rates have hit as much as five times the usual rate. “We judge success by how infrequently it is on,” Black said, adding that surge pricing applies to 1 or 2 per cent of Uber trips each week in Toronto.
Taxi companies, and some riders who post screen grabs of their Uber fares on Twitter and Instagram, say it’s simply price gouging.
“If people are having a hard time getting home, they are going to pay whatever it costs, especially if you have a few drinks. It’s hard to say no if the other option is walking in a snowstorm,” said Kristine Hubbard, operations manager for Beck Taxi.
“It’s an appetizer to more surging,” she added. “People will start getting used to that.”
Hubbard argues that Uber is trying to decimate a regulated industry in Toronto with 5,000 licensed taxicabs by creating a parallel illegal taxi system.
Uber has ignored the city’s rules, refusing to get a brokerage licence and saying it merely links riders with drivers. The city has filed an application for an injunction to block Uber’s operations — but a three-day hearing is not scheduled until next May.
In a 2012 blog post, Uber chief executive officer Travis Kalanick defended the company’s dynamic pricing, noting such systems are used by hotels, airlines and car-rental companies.
“What about that club that charges $5 cover on a normal weekend that then charges $100 cover on New Year’s does it,” Kalanick said in the post. “20x surge pricing.”
Uber Toronto’s Black says people should know that they can expect to see surge pricing during peak times this holiday season. That includes New Year’s Eve.
“In our busiest times of year, Uber does surge,” he said. “We do that because we want the system to be reliable.”
He acknowledged its algorithm can be switched off — as it was in Sydney — and has only been turned off once in Toronto, during the heavy rainstorm and flooding in 2013.
“It’s an algorithm that operates naturally. It’s not someone turning it on or off,” he said.