Taxi surge pricing study

Surge pricing — the practice of boosting ride-hailing fares during spikes in demand, is one of the most annoying occurrences to consider when ordering a taxi via a telephone app. It tends to benefit part-time taxi drivers but not full-time drivers according to a study led by Wei Miao, UCL.

For the purpose of this study, the authors compared earnings and hours of ride-share drivers in Guangzhou, where surge pricing was introduced in October 2019, with those in the nearby city of Shenzhen, which didn’t see surge pricing until two months later.

Their analysis indicated that, with surge pricing, the average individual driver saw a nearly 14% increase in weekly revenues. The research showed, however, that the gains mostly went to part-time drivers who could cherry pick customers. Full-time drivers, with less flexibility, ended up earning less on average than comparable drivers in a city without surge pricing.

Two effects were suggested of surge pricing in this study: a cherry-picking effect and; a competition effect, caused by drivers flooding into the area offering surge fares.

Taken together, the competition effect, which leads to reduced daily earnings, overwhelms the higher pay from cherry-picking.

The analysis found that after surge pricing went into effect, the number of drivers operating during peak hours in Guangzhou was approximately 20% higher than during the same periods in Shenzhen. Yet drivers in Guangzhou drove shorter distances, completed fewer trips and earned lower daily revenues compared with those in Shenzhen.

Not all drivers could simply add more workdays. Full-time drivers, arguably the most loyal and experienced, were already maxed out on the number of workdays, and as a result their weekly earnings fell. Part-time drivers, who could easily add more hours and days, did so and specifically targeted times when surge pricing would be in effect.

Drivers and ride-hailing companies could make surge pricing work better for themselves in a few ways. Full-time drivers could simply avoid the intensified competition by sitting out surges when they occur or by relocating to less competitive regions.

Ride-hailing companies also could help subsidise their more loyal drivers by taking lower commissions or providing bonuses. They could also do more to coordinate drivers’ schedules to minimise the effects of too much competition. In traditional taxi service, this is done by a central dispatch system. In decentralised ride-hailing, a company could provide a constantly updated map that displays all the drivers in an area and allow them to pick areas to work, depending on whether there is more or less competition nearby.