Uber’s Most Important Innovation Is a Pricing Algorithm
technologyreview.com
technologyreview.com
I've heard that surge once went to 11x. But that means that someone wanted a ride a 3.25x, 3.5x, 3.75x, etc. and so on including 10.5x, 10.75x, etc.
This paragraph disappoints me:
>The company itself should take no money during surge periods (it now takes 20 percent of every fare), so all the money goes to the drivers. Or it should cap prices to consumers but pay the higher price to drivers, essentially subsidizing people’s rides in surge periods. Or when prices rise really sharply, Uber should donate its take to charity.
They're providing the solution that gives customers a consistent experience even during surges. Why should they not be allowed to profit from that? Or why should they not be allowed to use those increased prices during surges to provide even lower prices during lower demand periods? It's really disappointing to hear people give such short-sighted opinions.
> So pundits have proffered a number of suggestions for solving the public relations problem.
> The company itself should take no money during surge periods… Or when prices rise really sharply, Uber should donate its take to charity.
> These are all interesting ideas. But it’d be a mistake for Uber to let public relations trump economics when it comes to dynamic pricing.
That is, the author isn't actually proposing these ideas, but is repeating and disagreeing with ideas that others have proposed. However, the context should be moved to that paragraph for clarity; as written, it's way too easy to misinterpret.
I took that as "... relative to the fixed costs charged by the rest of the service car/taxi industry". As the article notes other industries have been doing this for decades but Taxis still have pricing systems that have probably been in use for most of 100 years.
The reason that taxi fares don't vary is not that nobody until Uber had ever thought of varying meter rates. It's that, in developed nations at least, the government imposed a regular rate, largely in an attempt to forestall situations where there is real or perceived gouging of customers. The idea is that nobody could possibly be expected to maintain in their heads different meter rates for every taxi company in town, much less if those rates vary at times of days, and that you didn't want to compel people to jump in the car and then bargain with the driver (as is done in much of the developing world) or otherwise investigate the rates.
Uber's solution of advertising a multiple that you must very explicitly agree to before hailing is, don't get me wrong, a very elegant solution to the problem. But it's not as though they came up with the idea of variable rates for rides-for-hire.
Sounds like you're saying that something is a market, then.
>For example, in big disasters like hurricanes, certain goods like gas, wood, water, or food become especially valuable. While natural selfish reactions lead to higher prices for these key items, humans clearly evolved to see this behavior as uncooperative; we resist such price rises, and want to punish those who allow them.
>Perhaps this made sense for our distant ancestors, but today it is counter-productive. If these goods are not allocated by price, they will instead be allocated by standing in lines, personal connections, etc., processes that are consistently worse at giving goods to those who value them the most, and do worse at creating incentives to prepare for such scenarios.
EDIT: I'm getting a lot of replies with about the same argument so I'll just make a response here.
Uber and gas are not essential for survival. You can make the argument for water, but even that isn't necessarily better distributed with fixed prices. E.g. the recent water crisis in Toledo where people cleared out the shelves in minutes buying bottles of water they didn't need.
The biggest reason to allow price gouging is that it incentivizes increasing the supply. People come into the city bringing bottles of water to sell, people sell their personal supply. If price gouging was legal, people could make money storing supplies of resources to sell off during criseses. Supply and demand would eventually lower the price to what it costs to store resources for rare events. This kind of economic emergency preparedness should be encouraged as much as possible.
You're not allocating based on how much they're willing to spend, because anyone would be willing to spend anything to stay alive. You're allocating based on wealth.
It may seem natural to the HN anarchist-libertarian crowd that someone's wealth is a prefect proxy for the extent to which he deserves to be alive and "very strange" to think otherwise.
Personally, people with that attitude are about as close to "evil" as it's possible to get outside of a movie villain.
Perhaps there's something you're missing here.
Now imagine a natural disaster is expected and suddenly everyone needs to stock up on water and food. Retailers can basically inflate prices to whatever they like and people will pay, because they desperately need that water and food and it's not like a new retailer is going to set up shop and dramatically undercut them before the disaster hits. There are certain business practices that cannot be solved by the market, and price gouging during disasters is one of them.
The government doesn't help; it hinders, by subsidies, protective tariffs, and other distortions of the market. These policies help certain politically connected groups (mainly large agribusinesses), but they hurt consumers overall.
> imagine a natural disaster is expected and suddenly everyone needs to stock up on water and food
How long will the natural disaster last? How much can people economize on food and water during that time by simply eating less? How much can people economize by eating cheaper foods that provide nutrition but might not taste as good as what they normally eat? And so on.
Retailers can't inflate prices as much as they want because sane people will be asking themselves all the above questions, and will simply refuse to buy food and water at a price point that isn't worth it to them, all things considered. People need food, but the need is not infinite.
This is so true. In the aftermath of Hurricane Sandy there were plenty of gasoline shortages around NY; but the price did not significantly go up. If the stations were able to charge $9 or $10 a gallon, and the government didn't interfere, you can bet that companies/drivers would have been more than willing to import gasoline from other states. Why sell it in Ohio for $4, when you can sell it in NY for $10. Within a day or two, rather than the close to a week it took for normalcy to be restored; there would have been plentiful gasoline if you wanted it enough to pay.
Instead we had stupidity like even and odd days in some counties, and long lines when a station happened to have gas.
We have government roads that are not flooded down which anyone can drive a truck full of produce/whatever to compete with the incumbents.
Competition is less likely to exist when the infrastructure is decimated. Until transportation gets rebuilt, the local stores that have water are the only games in town.
Price gouging is by definition when merchants set prices for basic survival goods higher than they would be in a normally functioning competitive market.
When starving people participate in auctions with people who are not starving, even when both sides have equal wealth, the results may accord better with superuser2's prediction than yours.
So, let's say there's a sandwich. You aren't particularly hungry. I'm starving. We both have net assets of say, $125,000.
What exactly are you predicting? That you, not starving, will bid the price of the sandwich up to infinite levels because it's worth $125,000 to you to make me starve?
There is no price at which you say, "fuck that, I'll live without it." You won't. You'll die.
So you pay whatever they're asking, up to and including everything you have. If you had more, you would pay more. That's what I mean by infinite value.
In other words, your scenario does not just assume that you are dying of thirst. It also assumes that the merchant is evil, so evil that he will take everything you own in exchange for a single bottle of water when you are dying of thirst. Most humans are not like that. Why should you just happen to run across one that is at the precise moment when you are dying of thirst and he is the only merchant around? That's way too improbable to worry about.
In which case, he'll move on and sell it to the next guy.
> Or you'll try to take the water by force, since the merchant is obviously being unreasonable.
Okay, maybe, if you aren't outmatched.
> It also assumes that the merchant is evil, so evil that he will take everything you own in exchange for a single bottle of water when you are dying of thirst
This sort of proves my point. People understand that this kind of behavior is wrong, so they don't do it.
I was replying to someone saying it's puzzling that people consider this behavior wrong.
Exactly what sort of situation are you envisioning, where there are multiple people who want to buy water (but nobody but you is dying of thirst), yet only one merchant selling it?
One can always make up improbable scenarios.
> People understand that this kind of behavior is wrong, so they don't do it.
That's one possible reason why people don't do it, but not the only one. There are game theoretic reasons why not doing it is adaptive.
In any case, if your argument is that people think it's wrong to take all the assets of someone who is dying of thirst, in exchange for one bottle of water, then you've shifted your ground. Your original argument was that people must assign infinite value to necessities like water, because they will pay whatever it takes to get them. Now your argument is that charging whatever the person dying of thirst will pay is "wrong". This is a different argument, and I don't see what it has to do with your original claim.
> I was replying to someone saying it's puzzling that people consider this behavior wrong.
Huh? The grandparent of my first post in this subthread was questioning your assignment of "infinite value" to water (or anything, for that matter). Perhaps you're thinking of another subthread?
You do realize that this qualifier (which is entirely correct and necessary) completely undermines the rest of your argument, right?
If one is really worried about certain people simply not being able to afford necessities during times of scarcity, like natural disasters, forcing prices to remain fixed won't solve that, because if prices remain fixed, people have no incentive not to buy things they don't really need (for example, water that they won't need to drink until after the natural disaster is over). So forcing prices to remain fixed just means goods get allocated by who can get to the store first, rather than who is willing to pay the most. What one would need to do is allow prices to increase, but subsidize purchases of necessities for people who truly can't afford them in a crisis. (Or one could set up a charity that bought the goods, paying the higher price if needed using donations for funding, to ensure they would be available to the indigent.)
In this case, rich people will not stop buying water at the absolute minimum necessary - after all, people (a) like to be more comfortable than just the absolute minimum necessary, and (b) are not very good at estimating what the absolute minimum necessary is. So your argument is wrong: rich people will bid up prices significantly to be able to go through the crisis with less discomfort. [0]
As a consequence, it is quite likely that poor people will have to suffer a loss of almost all of their (already few) assets just to survive. That's not a very moral outcome.
Besides, you seem to be operating under a false dichotomy. The choice isn't between (a) letting market forces run wild and (b) fixing prices while otherwise pretending as if nothing bad has happened. The choice is between (a) letting market forces run wild and (b) fixing prices while in the meantime implementing explicit rationing and making sure the underlying infrastructure problems are resolved as quickly as possible.
Option (b) is what most down-to-earth, clear-thinking humans will come up with in a matter of minutes. It is also the better course of action.
[0] In addition to this, consider that an argument that you made yourself can be used against you: Given the uncertainty of the crisis situation, it is quite plausible that rich people will make panic hoarding purchases of more than they need until the crisis is over, thereby bidding prices up even further.
Then, as you imply later on, you have an underlying infrastructure problem. This is a different scenario from a natural disaster, which was the original scenario under discussion. A natural disaster is temporary; a shortage of water such as you are describing is not.
> fixing prices while in the meantime implementing explicit rationing and making sure the underlying infrastructure problems are resolved as quickly as possible.
You can't both fix prices and implement explicit rationing, because explicit rationing replaces the price mechanism; it doesn't supplement it. Explicit rationing and the price mechanism are both resource allocation methods; you can't have the same resources being allocated by two different methods.
As for resolving the underlying infrastructure problem, I'm all for that, but it's subject to the same issues: just look at the history of water rights in the southwest U.S. Government intervention hasn't fixed that.
> Given the uncertainty of the crisis situation, it is quite plausible that rich people will make panic hoarding purchases of more than they need until the crisis is over
Now you're back to the original temporary situation again. Which one do you want to discuss? They're different.
Also, you have now added uncertainty to the mix, which makes things more realistic, but also undermines your argument, in both the temporary and the permanent cases. If there is uncertainty about what the resource availability actually is, then a central allocation mechanism, like explicit rationing, can go wrong just as the price mechanism can; no method can guarantee success if the true facts are unknown. So just saying that the price mechanism might not work is pointless; you have to show that the price mechanism must necessarily be worse than explicit rationing.
Or perhaps you just failed to understand the obvious ellipsis? (total amount of drinkable water available in the region in the aftermath of natural disaster)
> You can't both fix prices and implement explicit rationing, because explicit rationing replaces the price mechanism;
Step 1: Fix the price of a bottle of water to whatever it was pre-disaster. Step 2: Institute a system whereby each household may buy at most X bottles. It's not exactly rocket science.
It wasn't obvious to me before, no, but now I understand what you were getting at.
Btw, I did misspeak here: > You can't both fix prices and implement explicit rationing, because explicit rationing replaces the price mechanism
I should have said that fixing prices, in and of itself, replaces the price mechanism; the price mechanism only works if you let the market determine the price instead of fixing it. If you intended "fixing prices" to imply that you are replacing the market price mechanism, then we don't actually disagree on that point. Sorry for the confusion on my part.
> Step 1: Fix the price of a bottle of water to whatever it was pre-disaster.
How do you know that's the right price? If your answer is "because that was the market price pre-disaster", then whence comes this sudden faith in markets?
> Step 2: Institute a system whereby each household may buy at most X bottles.
How do you determine what X is? What if it varies by household? What if some people need more water per person because of a health condition? What if...
You are making the mistake central planners always make: you are assuming that whoever is rationing the water can know all the necessary information in order to ration it correctly. In the real world, this can't happen; there is too much information and no way for the central planner to get it all.
Market mechanisms and prices are useful for guiding the long-term structure of production relations in society. In a sense, market mechanisms provide a meta-heuristics-type solution (think genetic algorithms) for problems that are very difficult to solve via other means.[1]
Now, two things greatly diminish the usefulness of markets in a natural disaster crisis. First, market mechanisms tend to operate on a very large timescale (when prices rise, it takes months or years for new entrants to the market to appear). Second, the problems created by natural disasters are actually pretty straightforward.
You wouldn't use genetic algorithms to solve a minimum spanning tree problem, which is more or less the precise problem you need to solve when re-establishing transportation, for example.
On a more meta-note, while markets are obviously extremely useful, I don't think there's a lot of evidence that they work well when there is genuine scarcity for true essentials (such as food, shelter, water). They work well enough to provide those things at a steady rate as long as there are no shortages, but in times of shock (or, actually, if you look at the problem of hunger globally, when there are shortages) they don't seem to work so well (if by work well you mean delivering results that are acceptable to an average person's morality).
[0] Naturally, I am arrogant enough to believe that my understanding is more refined ;)
[1] Not necessarily because those problems are computationally hard, but because those problems are difficult to model and the input data is difficult to obtain.
(1) Markets do not just affect the long term structure of production relations (though they certainly do that). Prices of many goods and services fluctuate on a daily or even hourly basis. That is markets operating in close to "real time" to restructure economic activity in response to all kinds of changes in conditions.
(2) Markets do not just change when new entrants appear. There are other actions that market participants can take on shorter timescales to respond to changes in supply or demand. One key one is finding substitutes for goods or services that have become scarce due to some change in conditions.
(3) It's true that markets can't solve all problems, and that they work less well when there are non-market constraints operating, such as those imposed by a natural disaster. However, people who support markets (like me) are not claiming that markets can solve all problems; we are claiming only that, in cases where markets don't work well, other solutions (such as central planning) work even worse.
(One key reason for this is that most problems of resource allocation meet the conditions of your footnote #1: they are difficult to model and the input data is difficult to obtain. This applies to natural disasters as much as anything else: your apparent belief that such disasters are "straightforward" to handle does not seem to me to be borne out by what actually happens when central planners try to deal with such disasters. Btw, I think these problems are also computationally hard, in addition to the other characteristics you cite; that's another reason why markets, which are essentially distributed computation, work better than central planning, which is basically the Von Neumann architecture with a single-core CPU, with all its well-known bottlenecks.)
(4) If your criterion for working well is delivering results that are acceptable to an average person's morality, I don't think any system devised by humans has ever consistently done that in times of crisis. We're all still floundering, from that point of view. Markets are simply the "least worst" of the systems we've discovered so far.
Btw, I'd be interested to see your response to the "mixed" (market + non-market) method I proposed, in the post in this subthread that you originally responded to, for dealing with shortages in a crisis such as a natural disaster: some charitable organization (which could be the government, but does not have to be) buys necessities like food and water at the (increased) market price, and then distributes them to those who need them and can't afford them. This would allow the market to work, by giving an incentive to suppliers to increase supply (because prices are higher), but would also provide a mechanism for achieving a fairer outcome, by having the charitable organization act as a market proxy for the indigent. (Of course, it still leaves the charitable organization with the problem of how to fairly distribute its goods, but that problem is going to be there no matter how the goods are obtained.)
To put a finer point on it: Imagine a disaster that seriously impacts food delivery for several days, e.g. while access roads are cleared of debris/snow/whatever. You want some reasonable mechanism that distributes food to people until normal operations can continue.
Given wealth distributions as they exist today - i.e., unequitable ones - using flexible prices may lead to a situation where sufficiently rich people maintain their eating habits to an extent where not enough food can be provided to the poor, who are then likely to suffer entirely unnecessary deaths.
An alternate system of explicit rationing, such as has been used during major wars, works better in such situations.
Equity of distribution doesn't strike me a particularly good metric for dealing with emergencies anyway since it's easily maximized by not letting anyone have anything, which is essentially what 'gouging' bans achieve.
I believe the willingness to stand in line for an extended period of time is a much better indicator of value then having large amounts of money.
Really more than the pricing algorithm the competitive advantage of Uber and, more so, Lyft, 1) is aggressive rating of the drivers, which is a way of harnessing the community to police itself, and 2) being able to transparently watch the drivers come and get you and have the entire trip logged. Both of these create accountability and reliability. While taxis may be able to implement 2), I don't see how they will be able to easily implement 1).
[0] an aside: Spoke to an uber employee, typically when uber gets complaints about pricing due to surge, the response is, well, did you check uber black car? Because it was usually cheaper to take an uber black car during that surge. (The prices for each of the subsets on the uber system are modulated independently).
Leaving the Internet Retailers conference in Chicago a couple of months ago, someone behind us in the shuttle line was remarking how they heard they could Uber to the airport for $41. Looking at our phone, we tried to tell them that the Uber price was surged to some crazy amount (can't recall exactly, I think it was $120-150). They kept telling us we were wrong - I'm sure it's hard to use the app and get sticker shock, but I wonder how often that happens.
> At the movies, for instance, prime-time tickets aren’t presented as a few dollars more than the normal price—rather, matinees are presented as a few dollars less. When American introduced dynamic pricing, it framed the 21-day advance-purchase requirement as a chance to buy “super-saver” fares. And happy hours at bars are, similarly, framed as a markdown from the regular price. These framing devices don’t change the underlying economics or price structure, but they can have a big impact on customer reaction.
The difference between Matinee / Happy Hour (Discounts) and Surge Pricing (Gouging) is not a framing device, it is a fundamental difference.
One says, "There is a basic price for this product or service which is fundamentally part of our business plan and represents the cost of doing business and some reasonable profit, but when the resource is under-utilized or we want to generate business, we will offer it at a discount - a price which we could not afford to offer at all times."
The other says: "We are going to charge more when we can get it."
I do agree that Uber would be better off not taking a cut of the surge pricing, that would make it a clearer incentive directly to the driver, but in that case why not offer a bidding arrangement?
It is fundamentally about allocating scarce resources only to the wealthy, and creating an economy where people who are not wealthy rely on that, rather than a simple and fair wage.
I'm usually pretty soft on Uber compared to Airbnb, I am no friend of the Taxi industry, but surge pricing is shameful.
So you think that is what the "regular" price of movies, etc. means?
There may be some instances where a "discount" price means selling at a loss (clearance prices for clothes to clear the racks for the next season come to mind), but in most cases (and I'm certain that movies, for example, fall into this category), the "discounted" price still generates a profit. The reason the seller does it is precisely that: more profits, by allowing additional profit-generating sales to happen that otherwise would not happen.
In a case like movies, it's true that there is another element: a matinee movie is not quite the same product as a movie in the evening, for a variety of reasons (for example, a dinner and movie date is more romantic to most people than a lunch and movie date). Theaters can charge more for evening movies because those movies are worth more to the customers. But this just emphasizes that the difference between your two cases is not really a difference. The cost to the theater of showing a matinee is basically the same as the cost of showing an evening movie, so the fact that evening movies are worth more to customers means that the theater is simply charging more when they can get it--i.e., when the product is worth more to customers, so they will pay more.
> It is fundamentally about allocating scarce resources only to the wealthy
If this were true, then, for example, movies would only be available to the wealthy, since, as I've just shown, movie theaters charge more when they know customers will pay more.
In fact, price discrimination (which is the usual term in economics for what we're discussing) increases the availability of products to everyone, precisely because it allows the seller to adjust prices (and possibly the product, as with matinees vs. evening movies) according to what customers are willing to pay. A society in which prices had to be fixed according to your first rule--"the cost of doing business and some reasonable profit"--would be a society in which products were less available, and in which being wealthy would confer more of an advantage than it does in our current society.
Think about it this way: So what is the problem with allocating scarce resources to the wealthy. Especially in this case, why should you be entitled to an Uber ride? You have plenty of other options, the easiest of which is 'wait for just a little bit until the surge dies down' (which is what you most likely would have done if the allocation were done by queue).
Finally, if you're charging the wealthy more, that's great! Because you're redistributing their wealth away from them.
For example, in NYC the peak weekday surcharge (analogue of surge pricing) is $1 per trip. source: http://www.nyc.gov/html/tlc/html/passenger/taxicab_rate.shtm...
If taxi cab companies were not regulated, we probably would have seen more price discrimination by now
I suppose taxis without price regulation are acceptable for taxi users who always use taxis within the same area/city. For out-of-town visiting (which are the only times I personally use taxis), knowing that taxis are well-regulated in terms of price is much more convenient (try arguing with a handful different taxi drivers at the exit of the airport of any major third world city, for example; it's a disgrace).
This is a big problem when you don't speak the same language as the driver and he/she can make up some extra fees just for you.
We've been practically without regulation for taxis here in Sweden for quite some time now, and it is a matter of shame every time an international guest gets ripped off. Many people wants taxis to be better regulated but local politicians doesn't do much about it.
And to be honest, 2x more expensive could certainly be worth it, if your average trips are long enough to allow getting some work or other things done during the ride.
P.S. As a video gamer, I find it hilarious that Uber is effectively an MMORPG mission/bounty list. Passengers are submitting "missions", drivers accept missions off their "terminal", and at the end "credits" change hands. And depending on your preferred MMORPG flavour, the megacorps exact their transaction fee for the privilege.
What’s striking about the Uber backlash is that the
company is hardly the first to use dynamic pricing.
There have always been crude forms of price
differentiation—or, as it is known in economics, price
discrimination.
the general mood being summed up by a tweet calling Uber “price-gouging assholes.”
Well, just gotta pay 5 bucks and get a thousand bots to retweet you then.