Read the following article and the question prompts.

Is Uber Price Gouging?

The Uber mobile app has become very popular. Rather than call or flag down a taxi for a ride home after a party or a football game, many people use the app to summon a driver who uses his or her own car to provide rides. Many consumers prefer Uber because they believe Uber drivers are more reliable in responding and arrive faster than taxis, particularly in smaller cities where taxi service is not always dependable. In addition, some consumers find Uber's payment system to be convenient. Because the user's credit card information is loaded into an app, the price of a trip is automatically billed to the card, and the driver does not have to be tipped.

Travis Kalanick and Garrett Camp founded Uber in San Francisco in 2009. They believed that the restrictions many local governments placed on taxi services meant that an inefficiently small quantity of taxi rides were being supplied in many markets. Because Uber relies on individuals driving their own cars, it is not legally a taxi service, and so it is not subject to government regulations on taxis. Taxi companies in many cities, though, have protested against Uber because it usually charges prices lower than the local governments allow the taxi companies to charge.

Typically, Uber charges lower prices than taxi companies chargebut not always. Uber sets prices based on the number of people who request rides at a given time in a given area, and it raises prices as demand increases. This "surge pricing" can more than triple normal prices when demand is very high. One rider used Uber to call for a ride on New Year's Eve only to find that instead of the expected price of $35, the charge would be $262. Kalanick argues that consumers should think of Uber prices the same way they think of airline ticket prices: "You know that if you buy a flight on the day before Christmas, it's probably 10 times more expensive than two weeks after Christmas." In addition, he argues that increasing prices when demand increases gives driverswhose pay increases with pricesan incentive to provide rides at busy times, such as New Year's Eve or at a stadium at the end of a football game.

But as the research of Kahneman, Knetsch, and Thaler has shown, consumers see it as more fair for firms to raise prices after an increase in costs than as a result of an increase in demand. Not surprisingly, Uber has come under criticism on Facebook and other social networking sites as a result of its surge pricing. Financial writer James Surowiecki suggests that firms such as Uber can avoid the criticism that surge pricing is unfair if they label the surge price the normal price and the lower non-surge price as a discount price. Just as movie theaters label the price they charge for tickets in the eveningwhen demand is highthe normal ticket price and the price they charge in the afternoonwhen demand is lowas a discount from the normal price.

It remains to be seen whether the resentment of some consumers over what they see as Uber's unfair surge pricing will limit the growth of the service.

Sources: "Uber Uber Alles," Economist, March 11, 2015; "Pricing the Surge," Economist, March 19, 2014; Douglas MacMillan, "Uber CEO: Surge Pricing Is Here to Stay," Wall Street Journal, January 7, 2014; James Surowiecki, "In Praise of Efficient Price Gouging," technologyreview.com, August 19, 2014; and Daniel Kahneman, Jack Knetsch, and Richard Thaler, "Fairness as a Constraint on Profit Seeking: Entitlements in the Market," American Economic Review, Vol. 76, No. 4, September 1986, pp. 728-741.

Questions to think about:

• What do you think about the competition between traditional taxi services and Uber services? Do you think taxi companies will be replaced by Uber in the future?
• Do you think consumers benefit from Uber services?
• Is it fair for Uber to charge higher prices for customers whose demand for ride services at a given time is inelastic?
• Should the government regulate the prices charged by Uber? What can the government to protect the wellbeing of consumers?
• What do you think about the future development of the market for Uber/Lyft services? Will there be other kinds of ride services to compete with Uber/Lyft in the future?