

Uber’s Most Important Innovation Is a Pricing Algorithm - acheron
http://www.technologyreview.com/review/529961/in-praise-of-efficient-price-gouging/

======
cperciva
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
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.

~~~
dnautics
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.

------
cle
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.

~~~
MBCook
> 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.

~~~
aetherson
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.

------
Houshalter
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...](http://www.overcomingbias.com/2009/09/the-dark-side-of-
cooperation.html)

>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.

~~~
superuser2
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.

~~~
aetherson
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.

~~~
makomk
For most people in Western countries, most of the time, the market more or
less succeeds in ensuring that food's available at a reasonable price
(generally with quite a bit of help from the government). If there's not
enough food being grown or retailers are charging too much, new farmers and
new retailers eventually drive the price down through competition. This works
because demand for food is predictable, fungible, and relatively constant.

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.

~~~
pdonis
_> the market more or less succeeds in ensuring that food's available at a
reasonable price (generally with quite a bit of help from the government)_

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.

~~~
cpwright
> 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.

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.

------
dnautics
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).

------
bdcravens
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.

------
justizin
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.

~~~
pdonis
_> "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.

------
sheetjs
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...](http://www.nyc.gov/html/tlc/html/passenger/taxicab_rate.shtml)

If taxi cab companies were not regulated, we probably would have seen more
price discrimination by now

~~~
nhaehnle
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
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.

------
fpgaminer
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.

------
benologist
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.

------
jusben1369
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.

------
jlas
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
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.

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

------
adam-f
Obligatory [http://xkcd.com/1373/](http://xkcd.com/1373/)

