Uber’s Most Important Innovation Is a Pricing Algorithm

http://www.technologyreview.com/review/529961/in-praise-of-efficient-price-gouging/

by acheron • 12 years ago

41 68 12 years ago

jusben1369• 12 years ago

What's cool about Uber is I agree this is super important but I'm not sure it's the most important innovation. I think they've done more to show the way for mobile payments than anyone.

benologist• 12 years ago

Their biggest innovation is something anyone can do that many others already do, and that is integral to entire industries "for the last three decades"?

    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.

Regulations artificially stifling other taxi services while you claim/hope/fight they don't apply to you seems like a bigger and more critical one.

sheetjs• 12 years ago

The whole reason why this "innovation" is possible is because taxi regulations put strict limits on price discrimination.

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

nhaehnle6• 12 years ago

As a taxi user, I consistently prefer using taxis in places where I know that I'm not going to be cheated.

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).

xorcist• 12 years ago

The mere act of getting into a taxi is enough to enter a binding agreement to pay the driver his fee to get you where you want, at least in my area of jurisdiction.

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.

cle• 12 years ago

I can't imagine that a dynamic pricing algorithm is terribly innovative. They're essentially adjusting price to control demand so that their service remains consistent. I have a hard time believing that's novel. It's the sum of all the parts that gives Uber its value.

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.

pessimizer7• 12 years ago

Surcharging a surcharge for return for calculating it sounds like the worst sort of rent seeking, but YMoralityMV.

mynameischriss• 12 years ago

Market pricing is not a surcharge.

matchu• 12 years ago

I think that paragraph is a problem of poor formatting. Observe the context:

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.

MBCook• 12 years ago

I can't imagine that a dynamic pricing algorithm is terribly innovative.

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.

aetherson3• 12 years ago

Well, they're legally required to.

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.

cliveowen• 12 years ago

Exactly, I wonder if there's really an innovative algorithm behind, or it's just a bunch of code that maximizes revenue with the simplex algorithm. Media are always quick in bringing up algorithms, yet I've never seen a single company release a paper with one of these algorithms, even when they're tangential to their business and not an advantage over competitors.

adam-f• 12 years ago

Obligatory http://xkcd.com/1373/

Houshalter• 12 years ago

The attitude people have towards price gouging in general is very strange. I never understood it until I read this: http://www.overcomingbias.com/2009/09/the-dark-side-of-coope...

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.

lukasb• 12 years ago

Robin's logic only works if you think the existing distribution of wealth is equitable. If you think unjust systems and behavior led to the current distribution, you would want to limit the extent to which wealth imbalance impacts the consumption of goods you consider essential.

nhaehnle6• 12 years ago

Precisely.

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.

penrod• 12 years ago

The horror - horror! - of rich people having more stuff than poor people is not alleviated by preventing prices from rising in times of scarcity - rich people can just pay others to stand in line for them.

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.

cperciva2• 12 years ago

CBC radio did an excellent program about price gouging a couple years ago; I highly recommend it (and also the rest of the Invisible Hand series): http://www.cbc.ca/theinvisiblehand/episodes/2012/06/27/the-g...

superuser24• 12 years ago

Every single human being ever in the history of time and space places infinite value on water (up to the quantity necessary to remain hydrated.)

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.

dnautics9• 12 years ago

Your first sentence is inherently contradictory and betrays a fundamental misunderstanding of the concept of value (or possibly, a misunderstanding of the concept of infinite).

aetherson3• 12 years ago

And yet, food prices, despite not being set by law, are not infinitely high. Nor indeed are they terribly high.

Perhaps there's something you're missing here.

pdonis10• 12 years ago

(up to the quantity necessary to remain hydrated.)

You do realize that this qualifier (which is entirely correct and necessary) completely undermines the rest of your argument, right?

ricardobeat• 12 years ago

processes that are consistently worse at giving goods to those who value them the most

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.

lazylizard• 12 years ago

i think. there's also a difference in the supply/capacity part. transport services are usually scaled to meet average load or perhaps somewhere a little more than that..i think they're usually not scaled to meet peak load. on the other hand, disasters are like a sudden decrease in supply. perhaps news of the decrease in supply will drive people's expectations..perhaps to imagine it will become worse..but demand could be largely the same.. the expectations part is fairly interesting..it seems to say that people dont trust the government to be of help when there is a disaster. or something like that.

bdcravens• 12 years ago

If Uber does it, it's innovation. If Yellow Cab does it, it's gouging.

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.

cperciva2• 12 years ago

It seems to me that the best way for Uber to implement surge pricing without the public relations fallout would be to combine it with UberPool: Instead of "surge pricing hours" have "car pool hours". Tell Uber customers that because there's so many people trying to go places right now, they'll have to share... and if they really don't want to share a ride, well, they'll have to pay extra for that privilege. Suddenly the story ceases to be "Uber is an evil company which hikes their rates during peak periods" and turns into "Some Uber customers are selfish and don't want to share".

krasin• 12 years ago

As it's noted in the article, surge prices may be up to 8x higher, and it's unlikely that car pool means 8 people in a car.

dnautics9• 12 years ago

Uber typically locks surge down to 3x and only lets it go higher if there is a specific reason to think that demand will be unusually high. My understanding is that the surge can only tick up if there has been a accepted request at the lower level in the timeframe, e.g., you can't get to 3x unless someone requested a ride a 2.75x.

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.

Vik1ng• 12 years ago

I don't think that will work well, when one of the main surge hours are like 2-3AM on the weekend.

dpweb• 12 years ago

This outrage about the surge pricing is really just some more first-world complaining. Prices have to float freely. It goes badly when artificial influences come into play, in short, when we muck with it. When they stop the surge pricing, the same people will be complaining when its busy there's no Ubers around to pick them up.

jlas2• 12 years ago

Anyone else annoyed by the claim that

  the general mood being summed up by a tweet calling Uber “price-gouging assholes.”

links to a tweet with underwhelming retweets and favorites? (1 and 2, respectively)

slingerofwheat• 12 years ago

I'm annoyed by the mentality that the number of retweets and favorites is a gauge for the validity of a claim.

Well, just gotta pay 5 bucks and get a thousand bots to retweet you then.

jlas2• 12 years ago

I guess one can ask if a tweet is a good measure of public perception in the first place.

justizin• 12 years ago

I think what's wrong with this article can be summed up in response to this statement:

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.

dnautics9• 12 years ago

Lyft tried Happy Hour and it didn't work so well, because it's difficult to create demand for something where people have specific use cases that are temporally and geographically constrained. It did motivate drivers to get off the road, which would be 'good' for connecting supply and demand but really drivers left permanently.

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.

pdonis10• 12 years ago

"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."

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.

dnautics9• 12 years ago

As an uber (and lyft, which also has a pricing algorithm) driver, my opinion is that it's not innovative, nor does it work, even setting aside the complaints from passengers[0]. What happens often (but not always) is that drivers rush to the areas which are surging, creating a glut of drivers in the area, but, in most cases, because of the short window when the rides are needed, it creates an uneven redistribution of drivers which may no longer be appropriate. It's reminiscent of financial markets which have self-reinforcing feedback loops where the pricing system can creates mini-bubbles (I suspect, as kindleberger, bigger bubbles are caused by aggregation of mini-bubbles, that are the result of other, non-market, forces at play).

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).

fpgaminer• 12 years ago

Having recently used Uber for the first time (a nervous but not wholly unpleasant experience), I decided to calculate and compare the cost of Uber to owning and operating a car. At least around my area, if you travel less than average (10,000 miles per year seems average; I checked at 3,000 miles), Uber is cheaper. Mostly because of fixed costs like the car itself, insurance, registration, etc. If you travel about average, then Uber is ~2x more expensive. This is with what appears to be reduced UberX fees right now (in my area?).

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.

Uber’s Most Important Innovation Is a Pricing Algorithm

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