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Eric Posner on the rationality of opposition to surge pricing [updated with a rejoinder to Posner's reply to this post]


University of Chicago law professor Eric Posner has written an interesting response to my post arguing that opposition to Uber surge pricing is largely the result of political ignorance or irrational evaluation of the available evidence. Unfortunately, his argument only applies to the small fraction of surge pricing opponents who also want to ban high prices for most other products.

Although Posner himself does not object to surge pricing, he argues that those who do may simply be opposing it on self-interested grounds:

Although a practice may be efficient, it doesn't follow that everyone is made better off by it. People rationally oppose surge pricing as long as they value the dollar savings resulting from a price cap more than the extra time they spend waiting for an Uber car or taxi to show up. These people oppose an efficient practice that happens to harm them. What's so irrational about that? In fact, the contrary view would be irrational.

The same reasoning can be used to justify imposing price controls on virtually all high-priced goods. People who value the associated savings more than they value extra search costs could potentially benefit from price controls in those instances as well. Yet very few of those who support surge pricing support across-the-board price controls in this way. As I noted in my original post, that is likely because they understand (at least to some extent) the economic functions of high prices in other contexts, but don't get the economic benefits of surge pricing (which are more counterintuitive).

Posner also posits that, at times when surge pricing is in effect Uber is a "cartel" with market power. But he provides no proof of this. Other firms such as Lyft can and do adopt the same business model, including surge pricing (as Lyft has done). Others are free to enter. To the extent that Uber does have market power, it is only because they were the first to make an important innovation in transportation technology, one that others can and do imitate. Indeed, if surge pricing results in quasi-monopoly profits for Uber, that is likely to stimulate entry by competitors. By contrast, imposing price controls would both de-incentivize such entry and also make Uber cars as unavailable during peak times as conventional taxis usually are. Perhaps more to the point, I highly doubt that most of the opponents of surge pricing in the general public know enough economics to base their opposition on this kind of moderately sophisticated cartel theory. The majority of the public does not even understand basic Econ 101.

Finally, Posner suggests that support for surge pricing is based on the assumption that "unregulated markets are efficient." I make no such general assumption. I merely contend—in common with the overwhelming majority of economists, including liberal ones—that price controls are inefficient, and that surge pricing insures that people get service at a time when it would otherwise be almost completely unavailable. Even if unregulated markets are not perfectly efficient (and I agree they usually aren't), price controls make things worse, not better. That's particularly likely when we are dealing with a dynamic new innovation that even well-intentioned regulators are unlikely to be able to price accurately. There are lots of forms of government intervention for which there are serious economic justifications. Banning surge pricing isn't one of them.

UPDATE: Eric Posner briefly responds to this post here, citing his recent Slate article arguing for regulation of Uber's prices. In the Slate article, he expands on his cartel argument in greater detail.

I remain unpersuaded. Posner's analysis relies on the idea that Uber has a platform that enables it to make monopoly profits due to the fact that rival platforms are hard to set up and may not be as efficient unless and until they can match Uber's vast size. But as I note above, other firms can and do imitate Uber's business model. And, given modern technology, the fixed costs of setting up a new platform are not that high. To the extent that Uber is making high profits because it is the first to adopt this model, that should only stimulate entry by other firms, as has already happened with Lyft.

At one point Posner analogizes Uber to the history of Microsoft. I think there is indeed an analogy, but not the one he suggests. In the late 1990s many argued that Microsoft's special position in the operating system market would enable it to monopolize the market for browsers. Given the ease of downloading and installing rival browsers (which could be done using Microsoft's own Internet Explorer browser), it turned out that Microsoft's "monopoly," such as it was, quickly eroded in the face of competition from Mozilla Firefox and others. Today, it is simiarly easy for consumers to download and use Lyft's smart phone app, and (soon) that of other competitors of Uber, and compare prices. For that reason, any market power Uber may have is unlikely to last. By contrast, the imposition of price controls to solve this (at most) minor problem is likely to both lead to supply shortages and retard the entry of new competitors into this rapidly growing market.

Posner also analogizes the situation to the introduction of the medallion system in the 1920s, which prevented jitney drivers from competing with taxi companies. If this analogy is valid, it too counsels against regulation, because the introduction of medallions greatly harmed consumers, by restricting competition—thereby creating the harmful cartel system that Uber has begun to challenge.

Finally, as I note above, I highly doubt that most of the voters who support price controls on Uber base their opposition on anything resembling the moderately sophisticated economic theory on which Posner relies. If Posner's analysis is correct, this would simply be a fortuitous case where ignorance and flawed reasoning leads people to stumble onto the right answer. In this case, the surge pricing opponents' ignorance of basic economics 101 (which shows why price controls are generally harmful) would offset their ignorance of somewhat more sophisticated cartel theory (which, if Posner is correct, proves that this is an unusual case where price controls could be efficient). I discuss some other cases where political ignorance turns out to be beneficial in Chapter 2 of my book on the subject. Unfortunately, for reasons I cover in the book, such case are the exception rather than the rule.