Business

Uber's surge pricing was explicitly designed to be psychologically painful

Uber's surge pricing algorithm was designed by behavioural economists who understood that the pain of high prices during periods of scarcity serves a market-clearing function: it discourages some demand while incentivising more supply (drivers). The controversial design choice was transparency — displaying the multiplier prominently rather than burying it. Internal research showed that customers who saw the 2.1x or 3.4x multiplier were more frustrated but ultimately more satisfied if they got a car. The psychological discomfort was considered a feature: it communicates scarcity and triggers rational decision-making about whether you really need the ride.

Source: Chen, M.K. & Sheldon, M., 'Dynamic Pricing in a Labor Market', SSRN Working Paper (2015)

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