Episode 516: Why Paying $192 For A 5-Mile Car Ride May Be Rational : Planet Money Leaving money on the table. It's a concept economists hate and one that the app Uber is trying to solve. But is this startup really solving a problem by charging you more for your ride to work?
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Episode 516: Why Paying $192 For A 5-Mile Car Ride May Be Rational

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Episode 516: Why Paying $192 For A 5-Mile Car Ride May Be Rational

Episode 516: Why Paying $192 For A 5-Mile Car Ride May Be Rational

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  • <iframe src="https://www.npr.org/player/embed/273060341/273331612" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

LISA CHOW, HOST:

So Jacob, tell me about the day your second daughter was born.

JACOB GOLDSTEIN, HOST:

It was a Friday afternoon. It was the summer. I got a call from my wife, who was still working all the way until she went into labor. She was coming to meet me at the office. She works right by my office in midtown Manhattan.

So I go downstairs. There she is. She's in labor. We've got to get to the hospital. Second babies come fast. So we go to the corner - Fifth Avenue - hard time to get a cab, right? There's lots of cabs. They're going by. They're all full. It's late in the day. It's hot.

Finally, a guy in a black town car pulls over. And good news is we're just, like, 10 blocks from the hospital, right? We're close. We just - so, finally, we got a car. Great. We're going to be there. We get in the car. We start going.

The guy says, it's going to be 25 bucks. And I'm ashamed. I'm truly ashamed to admit this. But I got angry when he said that. In the midst of all of my - wife's about to have a baby - emotions - the joy and the fear and everything. I'm all keyed up. He says, 25 bucks. I say, 25 bucks is ridiculous. This is like a $6 cab ride. You know...

CHOW: Dude, I can't believe you even heard 25 bucks.

GOLDSTEIN: That's fair. I'm ashamed that I heard 25 bucks. And, in fact, like, not only did I hear it. I tried to haggle with him. I was like, come on, man. That's ridiculous. Fifteen bucks - I'll give you 15 bucks. And I say that. And he starts to pull over. I was like, OK. OK. You win. You win. You win. You win. You win. I'll pay you. I'll pay you. Just get me to the hospital on time.

CHOW: So do you think he was charging you 25 bucks - basically four times the going rate - because it was hot, because it was late in the afternoon or because he saw that your wife was in labor?

GOLDSTEIN: You know, I don't know. And it's interesting question, right? Because it feels really different. If he's charging 25 bucks - plus tip, by the way - 25 bucks plus tip, he said. If he's charging 25 bucks just 'cause it's hard to get a cab, and it's a sort of straight-up supply and demand, it feels like, OK. He's kind of sticking it to me. But fair enough. That's just the market.

If he's charging me 25 bucks 'cause he sees that there's this pregnant lady in distress, and, you know, we need to go to the hospital, he feels like a horrible human being, right? Like, this is a baby. This is the time when, as the human race, we should all rally together, you know?

But rationally, it doesn't make a difference. In fact, rationally, he should've charged me more. I would've paid him a hundred bucks to get us to the hospital. You know, just get us there. Let's go. Let's go. Let's go.

(SOUNDBITE OF MUSIC)

CHOW: Hello. And welcome to PLANET MONEY. I'm Lisa Chow.

ZOE CHACE, HOST:

And I'm Zoe Chace. And I have heard Jacob tell this story about the birth of baby Olivia many times with that charming mix of shame and New York pride. And we brought him in to tell that story because today on the program, we're going to hear about a company whose entire business model is based around the scenario that Jacob describes.

CHOW: We'll hear about a company that charges people in desperate situations more for a ride sometimes four times - sometimes nine times - as much as it normally costs. And we'll consider the argument that this might be better for everyone.

(SOUNDBITE OF SONG, "FLAGGIN' A RIDE")

DIVINE FITS: Can't you see me waving? I'm flagging a ride.

CHOW: So the company we're talking about today is Uber. It's an app you have on your phone. And it's an app that lets you call a car.

CHACE: OK - legit, truthfully real talk right now - I have never seen this app in action. So you're just going to show me, like, how this works...

CHOW: OK.

CHACE: ...So we can explain it, right?

CHOW: OK. So when I open the app, it takes me to a map.

CHACE: OK. I see the map. And I see that, like, iPhone-y (ph) pinprick in the middle of the map. That's where we are. There's Bryant Park. That's our studio. And then around on the map - what - are those cars?

CHOW: (Laughter) Yeah. Those are cars.

CHACE: OK. So those are...

CHOW: And they're moving.

CHACE: Ew. That is so creepy. So OK - so those are the - what are those? The free cars that we could call right now.

CHOW: Yeah. I can click this to set the pickup location, which is where we're at right now.

CHACE: OK. So how much does it cost? Like, how much does it cost to get from here to Brooklyn?

CHOW: So it costs about the same as any car you'd call up in order.

CHACE: So 30 bucks, basically, is around what it is.

CHOW: Usually. But sometimes, they have this thing. It's called surge pricing, where they jack up the price sometimes two times, three times - sometimes nine times - the usual price.

CHACE: Even like three times the typical fare from here to Brooklyn is almost a hundred dollars. So that's, like - that's ridiculous. Like, why? If you live in New York, like, why?

CHOW: Well, it's not always that easy to get a cab, right? You know that, Zoe. For example, in rush hour or when it's snowing and has miserable weather outside, there's a ton of demand. And Uber - this company - when there's tons of demand, they charge more. For example, this one time a couple of weeks ago - remember we had a lot of snow?

CHACE: Yeah.

CHOW: That day, I used Uber to get a car. And it was, yes, snowing outside. It was rush hour. Surge pricing was in effect. And my driver, Kirk Fury (ph) - he was actually a little bit worried for me.

KIRK FURY: Are you going to get in trouble with NPR? You are almost at three times the amount.

CHOW: It will be interesting to see what the price tag is at the very end.

FURY: Oh, yeah.

CHOW: I'm a little worried. What your guess?

FURY: Three times the amount? Best guess - 150, maybe.

CHOW: Actually, the bill ended up being $192.

CHACE: (Laughter) That's crazy money. And Lisa, you have brought in your receipt from this ride for me to peruse. And looking at it, it looks crazy because it looks like you traveled for five and a half miles-ish - right? - at an average speed of five miles per hour. And that costs you almost $200.

CHOW: Yes. It seems outrageous, but we're going to lay out the argument that most economists would make that this is actually good for everyone.

CHACE: Right. So the argument here has two parts. One part is that the high price which, like three times surge pricing, that's sort of a bat signal to every Uber driver in the city. It's like they just put up the dollar sign in the sky, hey, you can make a lot of money if you get out on the road right now and go pick up passengers.

CHOW: And if you happen to be on the road already, and you're thinking about heading in, don't do it. You're leaving money on the table. Stay out longer. Case in point, my driver Kirk - the day I rode with him, surge pricing was in effect. Prices were three times the normal rate. And he rode that surge for 17 hours and didn't even stop for lunch.

FURY: I take little breaks here and now, but when the surges are on, you want to try to push yourself a little harder, ride it out. And you're also not doing it for the money. There's people out here that really just don't want to be standing out in the snow or in the cold. You do what you can to get them to their destination safely.

CHOW: Money helps though, right?

FURY: Money does help. Yes, it does.

CHOW: And it could be a lot of money. Kirk, like all Uber drivers, takes 80 percent of that total fare. So when fares are surging, he stands to make a lot more money. And this ability to make more money, of course, is a very powerful incentive, as we all know...

CHACE: Right.

CHOW: ...Economics reporters and one that Uber uses pretty precisely. So Zoe remember that map that we saw at the beginning?

CHACE: Yes.

CHOW: Uber is tracking customers and drivers down to the street level.

CHACE: Which is creepy.

CHOW: Yes. So sometimes there is surge pricing in one part of the city and regular fares in another.

CHACE: And the theory for that rate is that as drivers see a part of the city where fares are high, that's the bat signal, and they all go there. And then when they go their, supply meets demand and prices should come down.

CHOW: Kirk tells me he sees this happen all the time. In fact, it happens so quickly. It's a pain in the ass.

FURY: When I first started, I used to chase the surge, but then that became exhausting because it would always go somewhere else by the time I got there.

CHOW: And did you ever catch it - catch the surge?

FURY: (Unintelligible) Catch the surge when I was running for it - I think I might have caught it like once, twice, tops. And then I realized it ain't worth it. I missed it a lot more times than I caught it.

CHACE: Which is kind of the brilliance of this thing, right? The fact the surge ends before drivers, like Kirk, can get to the surge would tell us that surge pricing is actually working, like it's doing what it's supposed to do. Too many other drivers have beat him to the spot which is supply meeting demand, and that should make the price fall back to normal.

CHOW: So that's one part of the argument. Here's another.

ANNE TURNACOFF: I'm going all the way downtown.

CHOW: I met Anne Turnacoff (ph) in a line of people waiting for taxis outside of Penn Station. It's 20 degrees outside, snowing. Everyone wants a cab and there aren't many cabs. So the wait is long - about 30 minutes.

CHACE: And economists would say people like Anne, they may not be paying a higher than usual cab fare if they're waiting just in the taxi line, but they're still paying. They're just paying with their time, time spent waiting here on this line in the cold. And Uber is giving them this other option that instead of paying with time, they could just pay with their money.

CHOW: Would you pay double?

TURNACOFF: Yeah.

CHOW: Would you pay triple?

TURNACOFF: Maybe (laughter). It depends. If the cabs keep coming this slowly, it gets more likely. Maybe.

CHOW: So the argument for Uber is people like Anne would benefit, people willing to pay with money instead of their time and other people would benefit, too, specifically Uber drivers like Ara Hatatrian (ph). He tells me the story of December 14, here in New York City.

ARA HATATRIAN: It was rain, snow, sleet, freezing weather. So we were not driving. We were more like sliding on the streets. On top of that, it was also today of Santa Con. That's where people dress up as Santa Clauses and go get wasted.

CHACE: I remember that day of Santa Con. It was bad. I was actually in Penn Station, and I was surrounded by drunk Santas singing Christmas carols. And I took the subway.

CHOW: It was almost impossible to get a cab that day. Uber prices surged to seven, eight, nine times their usual rates. Ara told me about this one couple he picked up that day at seven times the usual rate.

HATATRIAN: When I picked them up, I felt very bad that I'm picking them up at that rate. And I apologized. I even offered to do some extra stuff for them like, you know, get them a cup of coffee or something just to make them feel better. But...

CHOW: Can you describe the couple to me?

HATATRIAN: Sure. There was a young couple about 25 years old. The girl was wearing a very short skirt in that, you know, chilly weather, and the guy told me that actually he doesn't mind paying the surge price because they were waiting for a cab for about an hour and a half outside. They called some car services. Nobody had cars available. And his girlfriend was so frozen that she said if he doesn't get her a cab. She's just dumping him.

CHACE: I guess - yeah. In that case, saving their relationship - it's worth paying seven times the regular price.

CHOW: Ara told me the final bill for this couple was $145. The couple decided their time was worth $145, and the guy that benefited from that was Ara. Without a service like Uber, that $145 would have gone uncollected. Nobody would have made that money where there was money to be made.

CHACE: And that idea that there's money left on the table, that drives economists crazy.

TIM HARFORD: If I'm waiting on the street for a cab for an hour, nobody benefits from that. There's no transfer to the cab driver.

CHACE: That's Tim Harford, author of a book called "The Undercover Economist."

HARFORD: The cab driver doesn't do better because I waited for an hour. I just do worse. Whereas, if I just pay the cab driver more, well, it still cost me, but at least there's been some benefit to somebody else.

CHACE: So it seems clear that Uber's pricing scheme benefits the drivers, it benefits people with money, like people with a lot of disposable income who are happy to pay not to wait in a snowstorm. But let's be honest, that is not the proletariat. That is not most of us. That does sound kind of unfair if you look at it that way.

CHOW: But economists would argue even if you don't have money and you're stuck waiting, you've actually benefited from the system because those rich people out there who are willing to pay, who are choosing to pay have gotten more cars on the road which ultimately means your wait time will probably be less than it otherwise would have been.

CHACE: And what I like about this is that we've been talking about surge pricing, but surge pricing is not like a new innovative pricing model. It's just actually pricing. Most things in the world work like this. You would just call it dynamic pricing, I guess if you want to be fancy like the stock market - company stocks. The stock market goes up and down all the time in response to supply and demand of whether people want to buy into the company. Commodity prices are like that, like if people want to buy copper then the price of copper goes up. The price of a thing fluctuates with supply and demand. And that hopefully is a pretty basic idea.

CHOW: Which actually raises a good question - right? So since economists love Uber's pricing strategy and a lot of the world already operates this way, why is what Uber's doing considered so strange?

CHACE: Right. Why does something like this ever happen?

UNIDENTIFIED WOMAN #1: Thank you for calling the Home Depot. Your call is very important to us, but all associates are busy at this time assisting other callers.

CHACE: Home Depot, for example, slammed this week in New York because everyone in this city was jonesing to buy ice salt, which if you're listening from Florida - it is salt that is used to melt snow on the sidewalk.

Do you have any ice salt left?

UNIDENTIFIED WOMAN #2: No, we did not, hun. We're completely sold out.

CHACE: When did you sell out?

UNIDENTIFIED WOMAN #2: We got a truck come in last night and as soon as that truck came in it was sold out.

CHACE: From Brooklyn to Manhattan.

UNIDENTIFIED WOMAN #3: If we have anything left - ice salt? No, we're completely out.

CHACE: You're completely out of ice salt?

UNIDENTIFIED WOMAN #3: Yeah. We just sold out like about two hours ago.

CHACE: Same thing happened in Jersey.

UNIDENTIFIED MAN: No, we do not.

CHACE: When did you run out of ice salt?

UNIDENTIFIED MAN: Yesterday.

CHACE: Imagine if Home Depot had dramatically increased the price of salt this week when everybody wanted it. That would have theoretically - right? - attracted ice salt suppliers to Home Depot thinking they could make more than the usual price, and that would also deter buyers from buying more salt than they actually need. In both those things would mean there would be salt on the shelves at Home Depot right now.

CHOW: So Home Depot is a huge company. They know they could raise the price of their salt and make a lot more money, but they don't, and there's a good economic reason they don't.

CHACE: Right. Richard Thaler is a behavioral economist at the Chicago Booth School of Business, and he says the reason most companies like Home Depot don't engage in this type of dynamic pricing is that people hate it. People hate feeling like they're getting punished with high ice salt prices just because it snowed, and it's not their fault it snowed. And companies like Home Depot - they're in a long-term relationship with their customers.

RICHARD THALER: What you typically find after a disaster like a hurricane is that businesses that are in it for the long haul, be it a hardware store or Home Depot or what have you, will keep prices stable and will run out. But entrepreneurs - let's call them - entrepreneurs will load a truck up with plywood from some other place and drive into the affected area and sell it for whatever the market will bear. And both of these agents are profit maximizing, so the entrepreneur doesn't really care if people hate him. But the local hardware store and Home Depot does. And so it's a long-run versus short-run question.

CHACE: And, in fact, that's probably what happened after the snowstorm here. Home Depot ran out of salt, and we found all these ads on Craigslist with people selling bags of salt at double or triple the price.

CHOW: Right. But generally people hate dynamic pricing so much that a lot of states have passed laws against it, specifically in cases of natural disaster. So how is Uber, a company that I presume hopes to have a long-term relationship with its customers - how is it able to get away with pricing their service in a way that the evidence suggests people hate so much?

THALER: We don't know whether they're going to get away with it. And I think the question will be how big a multiple the market will stand up for. And my intuition is that it's a number in the ballpark of three.

CHOW: Thaler says Uber's still a young company, and there's competitors coming into the marketplace.

CHACE: But this ballpark of three - that's not totally random because Thaler has looked at this. And he says people can tolerate a little dynamic pricing in their services like the idea that you pay a lot more for a hotel room during Super Bowl. That's something people just get, but there seems to be a limit to people's tolerance. In industries like hotels where prices do respond somewhat to demand, you rarely see prices go higher than three times the normal price.

CHOW: But there is somebody who knows exactly what the threshold is and that is Uber.

CHACE: Right.

CHOW: So I got Andrew Macdonald on the phone. He's a regional general manager for Uber Midwest, and I ran the Economist Thaler's proposition by him three times the normal price and more than that, you get in trouble. Uber knows what people do when they see a surge, and so they know how many people close the app at three times or four times or five times.

ANDREW MACDONALD: So, I mean, we do have data obviously. Most of that is proprietary, but, I mean, we trust the data and our algorithm works the way it works right now, which is that the multiple increases to a point where there is a supply and demand, you know, equilibrium.

CHOW: But I guess conceptually - conceptually do you think there is a limit?

MACDONALD: I mean, conceptually, there's not. You know, if you believe that...

CHOW: So you think people would be willing to pay, you know, 12 times, 13 times?

MACDONALD: Well, again, it's we give them the option - right? - so I think surge pricing is empowering people to make choices. I'm not sure that why conceptually it would make sense to say, hey, I'm going to let you choose to ride at eight times the normal price, but I'm not going to let you choose to ride at 10 times the normal price. You know, whether you or I as individuals would ride at 10x - that's a different question. You know, at that point, other options would probably be appealing to me, and I work for Uber, but why not give consumers that choice?

CHACE: But doesn't it make some consumers mad, like a lot of consumers mad when they see a price tag of hundreds of dollars for a ride from Manhattan to Brooklyn?

CHOW: Now, most economists are on your side. The problem is that most people are not on the side of surge pricing.

MACDONALD: I don't necessarily know that that's true. People like reliability. They like waking up in the morning and when they need a car, being able to get one because they depend on that car for their morning commute. And we want to give them a choice to have that car. So in a world without surge pricing, if there was a snowstorm and drivers, you know, weren't incentivized to get on the road, you might wake up, look at your app and not be able to get a car. That's, you know - that's you letting down your rider on a daily basis. And that's - that creates a much worse experience.

CHOW: Now there is a world in which you could take this type of pricing to the extreme, that is adjusting the price for each individual based on that individual's level of desperation in that moment.

CHACE: For example, Jacob Goldstein on the day that his daughter Olivia was born.

CHOW: What do you make of a story where a guy is trying to get a cab on a hot summer day and all the cabs are passing him by and he is with his wife who is nine months pregnant, and they're trying to get to the hospital. And a car comes and pulls along and charges them four times the going rate. How does that feel to you? Does that feel like a situation of price gouging or do you think that's surge pricing in effect?

MACDONALD: Like if the person pulls over and sees that the woman is pregnant and then decides that they're going to charge more? Is that the scenario you're describing to me?

CHOW: Yeah. And that she's in labor.

MACDONALD: I mean, I'm not going to speculate on like whether that's fair or not. I mean, obviously it's not, but we're not, you know - we are trying to create an efficient market not an individual discriminatory practice which is sort of what you just described.

CHACE: So even in the ultra rational world of Uber, Jacob, where price is king, babies still bring people together.

CHOW: Unless it's snowing or it's rush hour.

CHACE: As always, we want to hear what you thought of the show today. You can email us your thoughts planetmoney@npr.org. You can find us on Facebook, Twitter, etc. I'm Zoe Chace.

CHOW: And I'm Lisa Chow. Thanks for listening.

(SOUNDBITE OF SONG, "FLAGGIN' A RIDE")

DIVINE FITS: (Singing) I'm just trying to make my way. I got a feeling that you can relate. And I don't talk much, shoot straight. Can't you see me waving? I'm flaggin' a ride. Can't you see me waving? I'm flaggin' a ride.

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