

One winter weekend four years ago, Uber executive Michael Pao ran an experiment.
When Boston bars closed, and patrons poured out onto sidewalks, Pao and the crew overseeing the ride-hailing service here noticed that there was a severe shortage of Uber drivers. The experiment was to see if offering twice the normal pay rate at those crunch times would encourage more drivers to stay on the road, or grab their keys and head out for an hour or two of early-morning duty.
The experiment worked, and Uber’s surge pricing program was born. The system adjusts rates based on demand from riders in a specific neighborhood and the supply of nearby drivers. Surge pricing solved a business problem for Uber — but it created a perception problem. (Surely you’ve heard the New Year’s Eve horror stories.)
We’re in the midst of a surge surge. Everyone from Disney theme parks to NFL teams to restaurants are experimenting with the concept of dynamic pricing, or adjusting prices up or down based on demand.
What’s behind it? One reason is that we use apps and websites to buy so much stuff that it’s easy for companies to test out our reaction to different price points.
“We have better data than we’ve ever had before,’’ says John Gourville, a professor at Harvard Business School who has studied pricing. “With the technology available, it’s easy to change pricing. If you were expecting one level of demand, and you’re getting a different level, you can raise or lower prices instantly.’’
When companies roll out dynamic pricing, many consumers see it as “a pure money grab,’’ Gourville says. That can lead to a lot of squawking. But I think surge pricing gets a bad rap.
Do you remember the pre-Uber options for late night transportation around Boston? You had taxis and the MBTA. You basically knew how much each would cost, but taxis frequently don’t show up or keep you waiting insanely long in the wee hours, and the T doesn’t run after about 1 a.m. Of course, walking home was good exercise.
For Uber, surge pricing solves the problem of having too many riders opening the app and too few drivers on the road. Disney has rolled out demand-based pricing at its theme parks, where a single-day ticket can now cost about 20 percent more on a busy June day than in September, when all the kids have returned to school.
“The rationale is to smooth out demand,’’ Gourville says. “Now the consumer who is price-sensitive or price-savvy might choose to go on a less expensive day.’’ In San Francisco, Gourville notes, hourly rates for city parking meters fluctuate from a quarter to $7 per hour, and Boston Mayor Marty Walsh has proposed something similar here. Same motivation: If you need to run an errand and $7 an hour seems steep, do it a different time, and everyone enjoys less traffic congestion and less time spent hunting for a spot.
Adjusting prices can also benefit workers, in some circumstances. I’ve spoken with many Uber and Lyft drivers who’ve said that without the occasional periods of increased prices, they’d have to drive 10 or 12 hours a day. Boston College grad student Jackie Ouellet told me that she chose to only drive when surge pricing was active. “I made $70 to $80 an hour at times,’’ she told me last August.
When you pay a surge rate on an Uber or Lyft trip, the driver gets about 75 percent of every extra dollar you spend. (I’m not a fan, by the way, of Uber’s refusal to include a tipping option in its app.)
A growing number of sports teams are deploying demand-based pricing so that tickets for hot games cost more than those where fans care less about the rivalry, and even reservations site OpenTable has experimented with allowing restaurants to add an extra $100 fee (at the very high end) to nab a table on a popular night, with very little notice. (Today we call that surge pricing, but in the olden days it was called tipping the maitre d’.) Some of this can feel like pocket-lining, sure — but if the fee allows a great restaurant to earn enough money to open up a second location and create more jobs, not to mention tables, I’m all for it.
In April, I bit the bullet and bought a pair of pricey tickets from a scalping site for the Broadway musical “Hamilton.’’ The face value on the mezzanine ticket was $158, but I paid the scalper more than twice that for his “work.’’
If instead, all the money had gone to creators of the show and the theater’s owners, would I have griped about “Hamilton’’ establishing a vertiginous new peak for Broadway ticket prices? Yes. But I also would’ve been making an investment in the future of that art form (and business), rather than encouraging a scalper to scoop up tickets to the next hit in the hopes of a rich payday.
Can surge pricing be a societal good? Sometimes.
Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.