Uber riders already detest surge pricing, but it’s their own minds that sometimes trick them into paying more.
In studying its data, Uber has found that more people will take a ride when it’s 2.1 times the normal cost than if it’s only 2.0 times the regular price.
Why are they willing to take a more expensive ride? People tend to think that a round number like 2.0 looks like “somebody just made that up,” said Uber’s head of economic research, Keith Chen, on NPR’s Hidden Brain podcast.
“Like, you know, they must have seen it was raining and just decided to mess with me – right?” Chen said of passenger’s reactions. “Whereas if you say, oh, you know, your trip is going to be 2.1 times more than it normally does – wow, you know, there must be some smart algorithm in the background here that’s at work. It doesn’t seem quite as unfair.”
Chen was not saying that Uber actually sets surge pricing rates based on such rider psychology. Uber’s surge pricing is designed to balance the supply of its drivers with the demands of its riders. A higher surge means there’s too few drivers when passengers request, and it’s proportional to how many people are online driving or requesting a ride.
When surge pricing is first introduced into a city, it causes a 27 percent drop off in ride requests, Chen said. However, once riders get used to it, that number drops to 7 percent. The more you increase the surge multiplier, the further the demand drops.
“The surprising thing is there is a very, very strong round number effect which we detect. So when you go from 1.9 to 2.0, you see six times larger of a drop in demand than you saw from going from 1.8 to 1.9,” Chen said.
It’s puzzling, but the dropoff between 1.9 and 2.0 and subsequent uptick between 2.0 and 2.1, shows that people take more rides at the higher multiple than they would at just 2.0.
“It’s as if they’re telling you, I would rather pay you 2.1 times the normal price than I would 2,” Chen said.