When demand exceeds supply – Uber worries

Last weekend there was an article in Quartz about downside of Uber drivers rating passengers.

I had a rude shock recently when trying to hail an Uber cab. It showed up alright, but only barely. The driver told me he almost didn’t pick me up “because of your low score.”

 Low score? For what?!

The author frets about the inversion of power and how customers have no control over this and other ratings on us by all kinds of entities. The fundamental question here is, why does the rating of the customer matter when they’re handing you over cash? Especially in a transactional vs. relationship driven business like cab rides?

When drivers have the option to not serve a customer it means one very clear thing – demand exceeds supply. The irony is, that was the very reason why Uber and such services seek to address – by better matching demand with supply. And when drivers know the opportunity cost of declining a customer with lower rating is acceptable compared to expected value of serving a better rated customer they will do so.

But this assumes that the drivers somehow rationally compute the negative impact of serving poorly rated customer and incremental benefit from serving a better rated customer. In reality both the cost and the benefits are negligible and even out over large numbers. The drivers simply choose to decline because they know there are enough customers waiting for a ride.

The supply-demand mismatch is the driver for Uber dynamic pricing as well.

If you think about it, the customer and driver ratings should not matter to each other if this were a truly efficient market that Uber wants it to be. Imagine for a second if Uber pricing is done in the same as Adwords bidding.

  1. Customers state their destination and a maximum price they are willing to pay for.
  2. Drivers reply with a price same as bid price or a lower price based on their view of demand – in one variation they only see customer willingness to pay and bid only that and the destination
  3. In another variation the drivers also see customer ratings and can take that into account in the bid price
  4. If customers do not find any takers at their bid price they keep increasing it until their true willingness to pay or when they find takers (whichever is lower).
  5. In summary this becomes a simple two sided market decided purely based on price customers willing to pay and drivers who believe they can make a profit at those prices

All these driver and customer and driver ratings are really distractions to create an efficient market.

While we are there let us also get rid of the tips. At market clearing prices tips make no sense.

 

3 thoughts on “When demand exceeds supply – Uber worries

  1. Well, demand exceeding the supply may not be the only reason when the can driver declines to offer the service. Factors like distance from the current location of the cab to the pick up point, permit issues for commuting through some specific areas could be few plausible reasons. (Though this may not be valid for Uber, but other cab services do mention this reasons for cancellation.)

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