Surge Pricing Solves the Wild Goose Chase

53 Pages Posted: 28 Dec 2016 Last revised: 24 Mar 2018

Juan Castillo

Stanford University - Department of Economics

Daniel T. Knoepfle

Uber Technologies Inc.

E. Glen Weyl

Microsoft Research; Yale University

Date Written: March 20, 2018

Abstract

Ride-hailing apps usually match more efficiently than taxis, but they can enter a failure mode anticipated by Arnott (1996) that we call wild goose chases. High demand depletes the platform of idle drivers, so cars must be sent to pick up distant customers. Time wasted on pick-ups decreases drivers’ earnings, leading to exit and exacerbating the problem. Raising prices, either by keeping them consistently high or “surge” pricing only at high demand times, brings demand back under control and avoids these catastrophic failures. Banning surge pricing would thus likely result in always-high prices. Alternative solutions would undermine ride-hailing’s brand promise.

Keywords: wild goose chases, ride-hailing, surge pricing, dynamic pricing, hypercongestion

JEL Classification: D42, D45, D47, L91, R41

Suggested Citation

Castillo, Juan and Knoepfle, Daniel T. and Weyl, E. Glen, Surge Pricing Solves the Wild Goose Chase (March 20, 2018). Available at SSRN: https://ssrn.com/abstract=2890666 or http://dx.doi.org/10.2139/ssrn.2890666

Juan Castillo

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States

Daniel T. Knoepfle

Uber Technologies Inc. ( email )

1455 Market St
San Francisco, CA 94103-1331
United States

Eric Glen Weyl (Contact Author)

Microsoft Research ( email )

One Memorial Drive
Cambridge, MA 02142
United States
(857) 998-4513 (Phone)

HOME PAGE: http://www.glenweyl.com

Yale University ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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