Uber’s insane, algorithm-led surge pricing could be illegal soon

This month, a company-appointed arbitrator will hear arguments on whether surge pricing is in violation of antitrust law. The results of said trial could run Uber’s already fluctuating business into the ground.

Surge pricing is a huge part of Uber that allows an algorithm to optimize peak demand periods.

According to Uber, they claim that surge pricing increases driver supply but according to researchers, the feature redistributes existing supply while pricing out some customers as well as prolonging driver shifts.

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And while Uber has made changes to the feature multiple times, if surge pricing is found to be illegal — Uber could lose the ability to control the pricing of rides, the distribution of driver supply and the consumption patterns of riders.

Back in 2015, a Connecticut Uber rider, Spencer Meyer, sued Uber co-founder and then-CEO Travis Kalanick, alleging that Uber was engaging in price-fixing.

Price-fixing is when a group of businesses agree to charge the same price for a service and in Uber’s case, its drivers are considered contractors who operate as independent businesses. That being said, Uber actually determines the price that those contractors charge for their services.

“This has always been a simple case,” said the lawyer who filed the original federal district court action back in late 2015, Andy Schmidt. “Uber wants to have it both ways.”

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Schmidt is referring to Uber’s argument that it simply has a platform that matches drivers to their clients (riders) while setting the prices for rides.

“Uber says its drivers are independent actors. But Uber drivers do not compete against each other on price. When they surge prices, they do so in unison, something that could not happen without Uber’s coordination,” Schmidt shared with Motherboard. “Is that price-fixing? We think the answer is yes.”

Initially, the case was assigned to U.S. District Judge Jed Rakoff who dismissed Kalanick’s denial of price-fixing and moved the case forward.

And in March of 2016, he affirmed the plausibility of Meyer’s allegation that Uber was engaged in price-fixing by setting a price that drivers agreed to charge and wrote, “These agreements are organized and facilitated by defendant Kalanick, who as at least an occasional Uber driver, is also a member of the horizontal conspiracy.”

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The lawsuit could reveal an overwhelming amount of contradictions in Uber’s legal arguments that would stunt the company’s growth in a massive way.

California not only wants to reclassify Uber’s drivers from independent contractors to employees in the state but also is pushing for other states and cities to follow in their footsteps.

And if its drivers are reclassified from contractors to employees — then Uber exposes itself that company is engaged in price-fixing and that surge pricing is in violation of antitrust laws. In addition, it could add $500 million in additional labor costs to Uber’s already negative cash flow.

But if surge pricing is found to be illegal — the silver lining would be that Uber is a marketplace that matches riders to drivers that set their own prices.

“Then they’d really be Craigslist, which is what they say they are.”