Uber’s argument is that the algorithmically determined cost of a ride is at the sweet spot that will drive the most passenger demand while also providing sufficient incentive to produce the number of drivers to meet that demand. And because driver income is the product of both the number of trips and the rate paid, that sweet spot will also maximize driver income. Any attempt to set rates to specifically raise driver income would suppress rider demand, and so reduce utilization and thus wages. Of course, if too many drivers show up, this will also reduce utilization, but the economists seem confident, based on data that they were not authorized to share with me, that they have generally found that sweet spot.
If Uber had the courage of its convictions, it would be doing completely algorithmic pricing (including surging prices in a negative direction, below the base price), much as Google sets ad prices with an auction. Why don’t they? Because they believe that customers are more comfo