The Economist has an article about the rideshare industry. They pointed out that rideshare companies engage in price gouging when demand for their services is high:
This digital twinone of the most advanced of its kind, allows Uber to adjust its operations in real time. Annoyed passengers may think this enables the company’s “surge pricing,” when fares suddenly rise to balance the demand for rides and the supply of drivers. This is partly true. But the more immediate and positive effect is that the digital twin enables up-to-date route optimizations due to ever-changing city traffic.
(Price gouging is generally defined as a situation in which companies set prices above usual levels to avoid shortages.)
The taxi sector offers a good test for the theory that consumers do not like price gouging. Before the advent of ride sharing, New York’s taxi industry was regulated by the government, which set a standard price. As a result, it was extremely difficult to find a taxi during peak periods, when demand exceeded supply at the regulated price.
Ride Share companies decided to implement surge pricing during periods of high demand to avoid shortages. As you can seethey have grown into a dominant company in the New York taxi market:
I wouldn’t be surprised if a poll showed that most Americans are against price gouging. But economists generally attach little importance to polls; we are more interested in how people behave, that is, their proved to be a preference. And at least in the New York taxi market, it appears that consumers prefer price gouging to a stable regulated price.
A possible objection is that they do not like price gouging, but the fast and reliable availability of shared cars. But those are just two sides of the same coin. Flexible prices are both a necessary and sufficient condition to ensure that the quantity supplied equals the quantity demanded. You can’t have one without the other. So regardless of what consumers say, it appears that they actually prefer a price gouging regime to a shortage regime.
P.S. After I started this post I discovered a John Cochrane post that makes some of the same points.