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Price Gouging, Uber, and Alamo

with 4 comments

Last night I had to drive from Albany to New York.  My Virgin America flight from San Francisco got diverted, then had mechanical problems, and next thing I know I’m facing the prospect of spending Saturday night in the Schenectady Hampton Inn.

With the good fortune of sitting near the front of the plane, I was second in line at the Alamo counter at the Albany airport to rent a car to make the two-and-a-half-hour drive back to the city.  I was feeling pretty good about my prospects.  The man in front of me rented a mid-size for $80.  When I got to the counter and handed over my license, a troubled look came over the representative’s face.Screen Shot 2014-05-11 at 6.03.43 PM

“Oh wow — everything just changed.”

“What changed?”

“The prices.  The computers saw what happened with your flight.  It’s a lot different now.”

“How different?”

Alamo ended up charging me $600 for the pleasure of driving a rental car back to New York.  I was fortunate to find some fellow passengers to split it with me — company on the road is always nice too — but I still have a bad taste in my mouth.  It was an example of price gouging at its worst.

Uber has taken a lot of flak over practices that look similar at a high level.  Uber’s algorithms see surges in demand and raise prices accordingly.  Seems like old-school price gouging, the same kind that Alamo used against me in Albany.

But while I’m fuming at Alamo, Uber’s practices have never bothered me.  It really comes down to the elasticity of supply:  Regardless of how much Alamo charged, they weren’t getting more rental cars to Albany that night.  The first dozen people at the desk got cars and the rest were left with their hotel vouchers and the hope of a flight the next day.  The increase from $80 to $600 per car was simply a maximization of profit — an economic transfer from the customer to the company.  No additional economic value was created by the price increase.

Uber, on the other hand, has supply elasticity.  That is, supply changes quickly with the price offered.  If a customer is willing to pay $200 to get from the Upper East Side to the Meatpacking on a rainy Friday night, there’s going to be a driver willing to do it.  Increasing prices brings more drivers out, making it possible for more transactions to happen that “make sense” for both parties — even if those transactions are significantly more expensive than they would be on a sunny summer day.

Price gouging laws were built with the assumption of totally inelastic supply.  Price gouging laws exist to prevent Alamo from doing the kind of thing it did in Albany on Saturday night, or to prevent a grocery store from increasing the price of bread during a blizzard when more bread can’t be brought in.  When these laws were written, inelastic supply was the rule.  Logistic and supply systems didn’t exist on top of a digital layer enabling real-time changes in supply in response to demand.  But for some companies like Alamo, that digital layer still isn’t used to increase supply — just to raise prices.

I’m glad I got back to the city on Saturday night.  But it left me wondering why all the flak has landed on Uber for ensuring that supply can meet demand while Alamo is left to gouge and extract at will.

 

 

Written by Brad Hargreaves

May 11th, 2014 at 2:10 pm

  • Carol

    It’s been a few years, but when my AA flight from ORD to GRR was cancelled and we were going to be stuck in a hotel overnight, when I got to the front of the line to get my hotel voucher I asked if I could rent-a-car and drive instead. They let me and gave me a form to fill out to get reimbursed, and they reimbursed me promptly.

  • Brad Hargreaves

    They tried to get around that by promising a late-night bus from Albany to JFK. But it was already 9pm and I knew I would hate every minute sitting on a bus as it went from NYC back out to a (closed) JFK airport.

  • morrillkevin

    One benefit of Alamo charging so much is that the people who derive the most value getting to NYC that night now have the chance to. If they leave the price at $80, the resource isn’t allocated as efficiently to where it creates the most possible value.

  • Stanislav Ivanov

    Actually in this case Alamo also has supply elasticity! If price stayed 80$ those who were the quickest to get a car would drive away alone – and now they are incentivized to share the car with other passengers, who otherwise would have been left there. I am sorry for my english =)