Uber's "Route-Based Pricing" Predicts How Much You're Willing to Pay
bloomberg.com
bloomberg.com
I can't help but recall all the times Uber or its defenders claimed that its supposedly uniform fare scale meant that it could serve all neighborhoods equally, unlike the taxi companies. It will be interesting to see if this policy reproduces the same behavior while laundering it through machine learning.
Previously, no taxi driver would drive around in those areas - because of opportunity cost of higher fares in richer areas, and fears of getting robbed when there was tons of cash in the car.
Well, if Uber is using dynamic pricing to ensure fares from richer areas are more expensive than those from poorer ones won't that have the exact same effect?
If you are leaving drivers to their own devices to try to find hot spots, they have no way to know someone ten blocks over needs a cab right now from a poorer area.
Now every time I open it, it feels like just a liiittle too much to use for anything but a very occasional trip.
They get more from me for each trip I now almost never take. Win the battle, lose the war.
There should be a name for this kind of algorithm. How bout "Pyrrhic Optimizers"?
What we do know is that the algo isn't based on their cost, its trying to figure out the max it can charge me and "get away with it". I'm suggesting that its time horizon is much too small. It was enough to chase me away. That might be what they wanted. It may not be.
We are going to live in a bold new world, where getting picked up at Whole Foods costs X% more than a Grocery Outlet across the street. It's really amazing how loose they are with ethics and how willing to court controversy.
*Uber points to profits in all developed markets https://www.ft.com/content/afa1d4de-33bc-11e6-bda0-04585c31b...
I always see people saying that Uber subsidizes rides now and that rates will rise later if they win a market, but the evidence doesn't support those claims. If they just want to gouge people as everyone speculates they would already do so in markets where there is no "competition".
Instead, it looks like even absent a direct competitor, that they still have competition in the form of car ownership. We should be celebrating their ability to keep driving costs down until it's cheaper to use Uber than to own and operate a car.
Since it's not reliable I prefer it much less. I'd rather it just cost $16 both times.
It is an interesting sort of economic reality to speculate about...but I don't really have enough background to even credibly start.
1) All firms start doing it...because what Producer wants to leave money on the table?
2) The firm that does it best gains a significant advantage over competitors thus leading towards non-competitive market conditions.
And, from a purely speculative perspective, if the price discrimination advantage wasn't strong enough to result in one of the two above situations, then why would a firm invest in this sort of tech anyway?
But, like I said, I am no where near educated enough in the subject matter to really credibly start speculating too far. And it is certainly conceivable that competition could check this trend...but I don't believe it is a sure thing.
Let's say a ride is worth $20 for the consumer and $12 for the producer, for a total surplus of $8. If the price they agree on is $14, the consumer surplus is $6 and the producer surplus is $2.
If the producer can be sure the consumer values the ride at $20, they can charge $19 and take home most of the surplus.
Now lets introduce a competing producer, which is equally competent and can also figure out all this.
By your "what Producer wants to leave money on the table?" theory, they would also charge $19, and maybe get half the market that way.
But obviously they could also charge $18, get all of the market, and make a lot more money. Producer 1 will obviously retaliate and prices will go down.
Competition doesn't always work. It isn't magic. It may even need assistance. But to say it never happens is just... not.
Phone providers are a good example of this: In France for many years there was phone providers with extremely high prices: 50, 60, or even 70 euros per month for unlimited plans. They were all telling how their prices were fair, that they need infrastructure investments, etc etc. Then came a disrupting player: 'Free', who started charging 20 euros per month for the unlimited plans. Immediately, the 3 other players started offering 20-25 euros unlimited plans as well. The infrastructure hasn't suffered from this, 4G came as expected, and Free is now one of the major players.
What would happen in your example, is, unless a 'Free' equivalent shows up, is that they would all charge something around $19.
> In France for many years there was phone providers with extremely high prices
It's a lot easier to spin up a new taxi app that undercuts Uber/Lyft than it is to build new telecom infrastructure.
Nothing's stopping Newber from showing up with a shiny new app and undercutting both, if consumers are upset enough.
Economists have studied this stuff extensively for a very long time, and their consensus is that normally markets are quite effective at keeping prices down, as long as they're kept open.
There are certainly exceptions and corner cases where it works differently, but that is what they are.
As the sibling comment points out : "Nothing's stopping Newber from showing up with a shiny new app and undercutting both". As long as this statement stays true (i.e Lyft/Uber don't abuse their dominant position to prevent competitors to enter the market), then the market should be healthy. I'm not convinced they would though.
But...let's remember first that my intent is not to make claims...I am merely continuing a mental exercise in speculation/critical thinking.
Forgive me if I am over simplifying, but the example you forward is a traditional take on perfect competition.
But I don't think that we should discount the possibility of a lack of competition in this theoretical market. First, Price Discrimination itself requires that the firm doing the discriminating has some degree of monopolistic control/power in the market [1]. The existence of any price discrimination precludes the presence of effective competition in a market.
I think the Uber market is one that already exhibits signs of imperfect competition given the plethora of competitors that have struggled to find a footing:
* https://techcrunch.com/2016/11/08/uber-competitor-karhoo-shu...
* http://austininno.streetwise.co/2016/11/30/scoopme-an-uber-c...
* https://qz.com/583498/uber-competitor-sidecar-is-shutting-do...
Let's further suppose that Uber chooses not to pocket the revenue from this price discrimination immediately and instead re-invests it in the short term to establishing a Network Externality [2].
> Network effects become significant after a certain subscription percentage has been achieved, called critical mass. At the critical mass point, the value obtained from the good or service is greater than or equal to the price paid for the good or service.
If they keep it up long enough they should be able to slowly grind competitors out of the market. And while they might actually succeed in creating a monopoly, they don't have to in order to start rent-seeking [3]. Arguably, they already are doing so by increasing producer surplus with this price discrimination and widening the gap between rider cost and driver pay.
In this dystopian market state, Uber need not fear competitors because they could reduce their rent-seeking percentage to match or beat new entrants. They could also spread costs of undercutting local competitors to their entire user base (including raising prices on users it identifies using this price discrimination technique that would be willing to stomach the increase) which would allow them to potentially operate at margins unsustainable/unattainable for new competition. This would be a classic monopoly [4].
Now, there is nothing intrinsically bad about markets that have Monopolies...in fact there are some examples where it is more efficient to have a single supplier. But that is a different speculative discussion. I am just trying to explain why competition may not be an effective check to this practice.
TL;DR Uber's market likely already suffers from imperfect competition casting into doubt the effectiveness of competition to check this trend. Moreover, a firm might use price discrimination to carve out network externalities in amenable markets.
[1] http://www.economicsonline.co.uk/Business_economics/Price_di...
[2] https://en.wikipedia.org/wiki/Network_effect
(so riders with options will not choose the fair with a larger supplier surplus)
The reason they invest in the technology is because they are able to utilize it across enormous numbers of fares.
That seems to just skirt around the issue. The basic (Econ 101) point of competition is that if all existing firms are making 100 units of profit, and a new firm can make 50 units of profit by offering an equivalent product at a lower price, then that new firm will take business from the existing firms.
It's something we'll try to explain to our grandchildren and they'll try to understand it like we try to understand how people fought duels in the 17th century.
In the short run, my willingness to pay Uber is roughly "whatever Lyft is charging for the same route."
In the long run, if Uber and Lyft somehow collude to increase prices a lot, I buy another car and use both services much less. My short-run behavior won't tell them where this threshold lies, and once it has happened it is too late for them to get my business back for a few years.
Price discrimination works if you have real market power, or if marginal and average costs are hugely different (see: airlines, software). Uber's business doesn't seem to resemble either situation.
As for the ethics of Uber, it is like the $1 billion in my bank account. It doesn't exist :)
The "Standard oil strategy" of losing money to drive your competitors out of business doesn't really seem to work. If Uber declares victory and jacks up prices, presumably they will have a dozen new competitors the next week. How long did it take substitutes to pop up when Uber and Lyft left Austin?
What an actually evil Uber does at this stage is climb into bed with the regulators, suggesting all kinds of new regulations to kick the ladder down behind them. Uber doesn't seem to be going down that route so far.
Charging more for trips based on supply and demand makes sense. Why wouldn't you charge more for passengers who are willing to pay more? But it seems completely ridiculous for Uber to treat that money differently and take 100% of it.
Monopolistic Power:
The ability to price a product/service based on a customer's willingness to pay and not the product's cost is the key sign of a company's monopolistic power. Most companies and industries do not have the privilege of pricing this way. But a select few can charge customers their maximum willingness to pay, and reap huge rewards. Think Google's ad bidding model.
People who have been saying that Uber, Lyft and other rideshare companies are perfect substitutes might have an issue explaining this monopolistic power. The high-competition model for the rideshare industry would mean rides are priced on cost, not on value.
Allocation of Fixed, Perishable Inventory:
Some industries, for example airlines and hotels, have ~100% fixed, perishable inventory. A hotel room at the Hilton in Chicago has different for every night, and it's impossible to sell a room for a date in the past. It's also very hard for them to grow or shrink their airline seats/hotel rooms for a given period of demand.
Similarly, when an Uber driver is looking for work and an Uber customer is looking for a ride - the Uber driver is in a specific place at a specific time, and the Uber customer's demand is for a ride at that given time from that given place. If the price isn't satisfactory for both parties, the ride doesn't occur, and both lose out.
Even if there were 100 ride companies with intense competition, you could imagine the pricing changing based on perceived value. Airlines have immense competition (and historically limited profits), but still price based on value. Also worth noting, Uber not only can charge customers value-based pricing, but can also estimate the driver's willingness to work for a given price, and pay based on that amount.
The airline industry has been doing personalized pricing for years - if you don't believe me, redo a flight search in incognito mode. It's interesting how Uber's other transgressions have place a magnifying class over all their other activity.
I saw the same result on google.ca, and google.co.uk (When adjusted for exchange rates.)
Even more opaque than airlines.
Uber doesn't appear to be doing anything here that isn't already par for the course.
Why would Uber stop at the route and not charge by estimated user income, their job, age or maybe even the reason why they are traveling?
Ha ha! Yeah. Drivers tell me they have little consistency in their take; there was even a short time period where Uber stopped paying bonuses. (that didn't last long)
Worth pointing out also that Lyft only operates in the US. Uber is in 81 countries.
Should not be the way forward for Uber-like (read other 'push a button') services should be decentralized / p2p (sure i've watched Silicon Valley this week) in a way such that service provider and payer are not screwed like this. (Next Richard Hendricks out there - are you listening to this mate ;)