How Uber surge pricing really works

At the core of Ubers wild success and market valuation of over $41 billion is its data and algorithmically
fueled approach to matching supply and demand for cars. Its classic economics, supposedly: Prices go up
to encourage more drivers to go online. The increase in price is proportionate to demand, says the official
Uber video explaining their surge pricing system. Its an easy line to buy into, but is Ubers surge pricing
algorithm really doing what they claim? Do surge prices really get more cars on the road?
My analysis suggests that rather than motivating a fresh supply of drivers, surge pricing instead re-
distributes drivers already on the road.
I collected four weeks worth of Ubers dynamic pricing information from their own publicly available data
for five locations in Washington, DC. Every 15 seconds between March 15 and April 11, I pinged their servers
and collected the surge price and estimated waiting time for an UberX car at those locations. Though only
a tiny sliver of all of Ubers data, it provided an initial window into how their algorithms are working.
The data do show that surge pricing works to maintain or improve service quality in the neighborhood of
the surge, measured roughly as the estimated waiting time for a car. If the Uber system is working as
advertised, we would expect price surges to come into effect to keep estimated waiting times in check as
demand increases. The next graph shows how estimated waiting times correlate to changes in prices after
some amount of time has passed for drivers to react.

The chart shows that in some locations an increase in price led to decreased estimated waiting times within
a minute or two, such as in the Navy Yard, George Washington University, and K St. areas. But on U St. and
Adams Morgan, the response was more muted: several minutes after a price spike the wait times were still
going up, albeit less severely. The pricing system is working to reduce estimated wait times, but it seems to
be working better in some neighborhoods than in others.
But price surging can work in any of three ways: by reducing demand for cars (less people want a car for a
higher price), by creating new supply (providing an incentive for new drivers to hit the roads), or by shifting
supply (drivers) to areas of higher demand.
The data I collected suggest that surge pricing doesnt seem to bring more drivers out on the roads, but
rather pushes drivers already on the job toward neighborhoods with more demand--and higher surge
pricing. As a result, some neighborhoods are left with higher waiting times for a car.
So, why dont surge prices work to get new drivers on the road? It might simply be that surge prices jump
around too much. The graph below shows the surge price variation over the course of 12 hours at the
intersection of U St. and 14th St. on March 17. In particular, look at 1:54 p.m. when the price multiplier is a
healthy 2.3x. Yet, just five minutes later, the price multiplier is back to a normal 1.0x. In our data we found
that Uber prices change every three or five minutes, up to 20 times per hour.

From the rider point of view, the rapid changes in price suggest that if you see a higher surge, you should
wait a couple minutes and chances are it will have come down. But this chart also shows why its
counterintuitive that surge pricing will attract a lot more drivers. When prices are changing so quickly, we
cant really expect drivers to jump in their car and start driving in reaction to maybe earning a bit more
from a price surge.
Another reason to think that drivers arent jumping in their cars for surge pricing is that prices tend to tick
down in bigger steps than they move up. Nine percent of all price changes were less than -0.5 multiplier,
but only 5.5 percent were greater than +0.5 multiplier, which again may be great for riders, but for the
drivers a higher surge price may be met with a substantial drop off when they show up -- for them, price
surges are like an elaborate game of algorithmic whack-a-mole.
A forthcoming study by researchers at Carnegie Mellon University interviewed 21 Uber and Lyft drivers to
shed light on actual driver behaviors. The study, led by postdoctoral fellow Min Kyung Lee, concluded that
more than half of the interviewed drivers were not influenced by surge pricing information. Drivers
were put off by the fleeting nature of a surge price and the fact that being in a surging neighborhood doesnt
even guarantee that you will get pick-up requests from that area. If the surge disappears after three minutes,
before the driver even gets to the surging area, thats not very motivating.
The benefit of surge pricing on overall driver supply instead appears to stem from the long term effects of
communicating to drivers when they should in general get on the road for planned events, holidays, or
periods of expected high demand like poor weather.
Reached for comment, Uber spokesman Taylor Bennett stressed the long term perspective, dynamic prices
serve not only to allocate the existing set of drivers spatially over a city, but also to signal when the highest
value times are for driving. Such high value times are communicated to drivers via their in-dashboard app
which they can learn from, as well as by examining their earnings reports.
But for such a long term outlook, pricing is changing awfully frequently, and is highly localized. The analysis
shows that when prices are higher in one neighborhood it saps driver capacity away from an adjacent
neighborhood. For instance, if surge pricing is higher on U St. or K St. I found that the estimated waiting
time, a proxy for the service quality, suffers in the Navy Yard. As the next chart shows, if the price surge is
higher on U St. than in Navy Yard this means a rider in Navy Yard would have to wait longer for a pick-up.

Uber spokesman Taylor Bennett noted that, [The] analysis of such a small, short-term sample of data
cannot capture long-term patterns and does not fully consider the complete set of price elasticities that are
present. Thats true. The data here are limited and estimated waiting times are only a proxy for actual
service quality. Only Uber has the capacity to use its internal data to show us to what extent price surging
decreases demand, creates supply, or shifts supply. (In the interest of transparency, my analysis is online)
In the meantime, it appears that rather than getting more drivers on the road in the short-term, Ubers
surge pricing instead depletes drivers in adjacent areas. A price hike in one area means drivers move there,
but away from another, leaving it underserved. If someone in the newly underserved area now needs a car
they wait longer, or perhaps a surge price has to come into effect to get a car over there. At the end of the
day the Uber system appears to be more about re-allocation of existing supply. And this raises interesting
questions about which neighborhoods end up with worse service quality -- those crosstown from a stadium
or bars? Higher prices and better service for some means worse service quality for others.