Surge Pricing and Social Norms

Recently, my co-blogger John McGinnis had a great post on surge pricing.  His basic point was that surge pricing has both static and dynamic benefits – allocating cabs to those who most need them and increasing the supply of cabbies willing to work at needed times.  John also notes that these benefits are missed by most people because of political ignorance.

I agree with all of this, but I want to add a couple of things.  Part of the problem with surge pricing is that it conflicts with a social or economic norm that is (partially) accepted in our society.  The idea is that prices should be set and should not be adjusted to take advantage of people’s situations.  Stores do not increase the price of umbrellas in the rain and people expect that and criticize departures from the norm.  Restaurants do not generally charge more to eat at 7:00 than to eat at 5 (except for the rare early bird specials or for lunch menus, which often have smaller portions).

Yet, in other ways surge pricing is permitted.  Certainly airplanes adjust the prices based on when they are purchased, as do many other services.  So what is going on?

It is not entirely clear, but my guess is that people are simply reacting to norms that they are used to.  Some years ago, everyone in the airplane had paid the same price for a coach seat – not so these days.  (It helps that not everyone knows what others paid for their seat.)  People get used to it.  It used to be the case in law firms that people were paid based on seniority – not so these days.  Many people did not initially like the changes, but they got used to them.

Of course, some surge pricing is criticized for taking advantage of people’s misfortunes, as when prices go up for cabs in the rain or when stores charge more for water or ice during a weather emergency.  By itself, I don’t believe that would prevent people from coming to accept surge pricing in these circumstances.  After all, knowledgeable people could help to educate them and explain how the pricing deters others from wasting resources, as when people purchase “too many” bottles of water because it is sold at the normal price during an emergency.

The bigger problems are two.  First, emergencies are relatively rare circumstances and so it is difficult to educate people when they happen so infrequently (and are occasioned by such strong emotional reactions).  Second, the power of the state is used to punish people who surge price during these emergencies.  Thus, there is never a chance for people to get used to the surge pricing.

Still, all is not lost.  There is a potential for progress.  The Vox website recently had an essay arguing in favor of surge pricing.  Yes, you read that right!

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