Two young entrepreneurs, Garrett Camp and Travis Kalanick, created Uber in 2009 to alleviate a common frustration: how to find a taxi when you need to get somewhere and there arenʼt any taxis available. In densely populated cities like New York City, finding a taxi is relatively easy on most days — stand on a corner, stick out your arm, and before long a taxi will stop to pick you up. And you know exactly what taxi fare rates will be before you step into the car, because they are set by city regulators. 

But at other times, it can be difficult to find a taxi, and you can wait a very long time for one — for example, on rainy days or during rush hour. As you wait, you will probably notice empty taxis passing you by — drivers who have quit working for the day and are headed home. Moreover, there are times when it is simply impossible to hail a taxi — such as during a snowstorm or on New Yearʼs Eve.

Uber was created to address this problem. Using an app, Uber connects people who want a ride to drivers with cars. It also registers drivers, sets fares, and automatically collects payment from a registered riderʼs credit card. Uber then keeps 25% of the fare, with the rest going to the driver. As of 2019, Uber was operating in 65 countries and in more than 600 cities, and booked $11.3 billion in rides........

QUESTIONS

1. What accounts for the fact that before Uber’s arrival, there were typically enough taxis available for everyone who wanted one on good weather days, but not enough available on bad weather days? 

2. How does Uber’s surge pricing solve the problem? Assess Kalanick’s claim that the price is set to leave as few people possible without a ride. 

3. Use a supply and demand diagram to illustrate how Uber drivers can cause prices to surge by taking coordinated breaks. Why is this strategy unlikely to work in New York, a large city with an established fleet of taxis?