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Wednesday, 22 July 2015

Uber Irrational

Wet and Irrational

A few weeks ago a group of French taxi drivers attacked the US singer Courtney Love's car as she tried to get to Charles de Gaulle airport in Paris. As it turned out this wasn't a Franco-American cultural argument over the relative merits of Ms Love's brand of alternative rock, but a side-effect of an industrial dispute that has its origins in the complexity of behavioral economics.

In fact, at root, it's about whether you'd like to be able to find a cab in the rain in New York. 

The Case of The Vanishing Cab Drivers

You're in a big city. It's raining. You need a cab. There are none to be found. You wander about, damp and sad, along with a bunch of other similarly drenched souls, feeling perplexed. After all, you’d imagine taxi drivers would be eager to maximize their earnings and rainy weather is one of the best incentives to seek a ride you can imagine. As the rain comes down, so demand goes up and rational economic theory predicts supply will rise to meet it.

But to the casual, and very wet, observer this doesn’t seem to happen. Something is going on that’s not obviously rational. 

Maximizing

The mystery of the vanishing cabbies has been an enduring one and, oddly, a bit of a battleground between the adherents of behavioral economics and the old school of pricing driven behavior. Perhaps it's less a battle than a minor skirmish, but it's an interesting one nonetheless.

Back in 1997 Colin Camerer, Linda Babcock, George Loewenstein and Richard Thaler argued in Labor Supply of New York Cab Drivers: One Day At a Time that the problem occurred because taxi drivers weren’t natural earnings maximizers – the fact that there were lots of ready customers in the rain didn’t lead them to work longer hours and earn more while the going was drippy.

Targeting

Instead they worked until they reached the amount they wanted to earn in a day and then stopped, a behavior the researchers called income targeting. As Camerer explained in  Taxi Drivers and Beauty Contests:
Many of the drivers we talked to said they decided how long to work by setting themselves an income target every day ... and when they reach that target, they quit. Target setting can be very motivating in unpleasant or tedious activities, like exercise. There’s also substantial psychological evidence that people dislike losing a lot more than they like corresponding amounts of winning. This implies that drivers hate to quit before they reach the target, but once they reach it, they aren’t very enthusiastic about trying to go beyond. So income targeting perversely predicts that cabbies are going to quit earlier on good days.
Where, of course, a "good day" is often a wet one, resulting in a distinct shortage of taxis just at the moment you really need them.

Wet Work

While this may be understandable behavior it isn't what neoclassical economics would regard as rational. Clearly, over a a period of days an income targeting cabbie will work more hours to earn the same money, assuming that the rational ones work longer on wet days and bother less on dry ones.

More recently Henry Farber has instead made the argument is that it's harder to find a taxi in the rain because driving in the wet isn’t much fun. In Why You Can't Find a Taxi Driver in the Rain and Other Labor Supply Lessons he suggests that:
Some drivers stop, but this is not due to their reaching their income target. Some drivers stop simply because it is less pleasant to drive in the rain and there is no additional benefit in continuing to drive
The traffic runs slower, so while it may be easier to find fares it’s harder to make money and the drivers simply give up because it’s an unpleasant experience.

Price Discrimination

Part of the problem is that most taxi fares are regulated. Under normal supply and demand if there's more demand then either the supply goes up or the price goes up and curbs demand. With regulated fares this doesn't work particularly well.

One obvious solution to the problem would be to introduce demand led pricing: if there are more customers then the price should go up, which will attract more drivers. This is known technically as price discrimination - setting different prices for the same goods: often a very unpopular policy, but one that can have significant economic benefits, as Mark Thompson explains:
Price discrimination can lead to efficient pricing, ... [and] to more intense competition which benefits consumers. When firms have difficulty committing to prices, they often are forced to charge low prices. In such situations, a policy which forbids discrimination endows a firm with commitment power and prevents the firm competing with itself, to the detriment of consumers and welfare
There are potential issues, but all things being equal price discrimination is a good thing.

The Surge

This idea of price discrimination lies behind on-demand taxi service Uber, which uses its real-time data to manage pricing. If demand is higher then the price goes up – and if it’s raining then people will generally be happy to pay the price.

This "surge pricing" model brings its own risks. In Sydney, during a hostage siege when everyone was trying to get out of the city centre, Uber’s surge pricing model sent fares sky high, and attracted a deal of bad press - algorithms don't always take human concerns into account. But in theory surge pricing should attract more drivers when consumers need them, regardless of whether it's raining or not.

Most traditional taxi schemes ban surge pricing because it allows the drivers to gouge unwary customers – but in our highly connected world there’s simply no reason for that to continue. An app that allows customers access to real time quotes for specific journeys could easily act as the basis of a negotiated price with any cab driver.

Behold the Buggy Whip

Of course, what we’re seeing instead is existing closed shops of taxi drivers using their muscle to pressure governments into banning Uber on spurious grounds. In France muscle is the appropriate term as Courtney Love discovered, but there have been disputes in cities across the world, from the UK to China and from Spain to India.

It ‘twas ever thus – entrenched interests won’t simply melt away, but will use whatever power they have to maintain their stranglehold on services. Buggy-whip makers tried to force car drivers to carry whips and UK purveyors of periwigs sought to have wig wearing made mandatory. Technology will eventually win, but in the meantime it's probably best to buy an umbrella and walk rather than trying to find a cabbie in the rain.

  

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1 comment:

  1. Or maybe get a bus? Which for some reason seem to be on the decline in my area especially at night. Cheaper, safer (as far as I'm concerned, having had a couple of scares in taxis) and kinder to the planet.

    ReplyDelete