
Uber's "Route-Based Pricing" Predicts How Much You're Willing to Pay - pdog
https://www.bloomberg.com/news/articles/2017-05-19/uber-s-future-may-rely-on-predicting-how-much-you-re-willing-to-pay
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gsch
> “Society is more willing to accept wealthy people paying higher fares,” said
> Chris Knittel, a business professor at the Massachusetts Institute of
> Technology. “But if the repercussion of lower fares in lower-income places
> is longer wait times, that’s probably what they want to keep an eye on."

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.

~~~
sebleon
Interesting, I hadn't heard that defense before. It seems like Uber's app-
based hailing is the reason why poor neighborhoods are able to get serviced.

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.

~~~
objclxt
> Previously, no taxi driver would drive around in those areas - because of
> opportunity cost of higher fares in richer areas

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?

~~~
erikpukinskis
No, because Uber publishes all of the ride requests, regardless of fare. As
long as there is one driver willing to go there, the ride gets fulfilled.

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.

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noonespecial
Its funny. When I first started using Uber, every time I took a ride and paid
the fair its was almost a joyous experience to pay what seemed like so little.
It made me want to use Uber for all sorts of trips and tell everyone else to
do the same.

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"?

~~~
jessriedel
They were losing money on you before by subsidizing your ride. Now their price
better reflect the actual economic costs, and it's not surprising that this
means you don't take a taxi as often.

~~~
noonespecial
Doesn't seem like we can know that for sure without knowing their complete
costs per ride. Even at the higher price that might still be true. It might
not.

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.

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payne92
We are building smarter and smarter machines that nickel and dime from us at
scale. How does this end?

~~~
gshulegaard
It leads to consumer surplus being further and further converted into supplier
surplus. Ultimately, this trend will approach 100% conversion so that there is
no more consumer surplus and all surplus is realized by producers.

It is an interesting sort of economic reality to speculate about...but I don't
really have enough background to even credibly start.

~~~
acchow
You're ignoring the existence of competition...

~~~
gshulegaard
Not really, competition only checks this effect if the price-discrimination
advantage isn't so compelling such that:

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.

~~~
BurningFrog
Let me try to demystify what we're talking about, and show competition works
fine even in this scenario.

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.

~~~
vmarsy
You're describing a "race to the bottom" those 2 competing producers would
participate in. But we all know that when there's a quasi-monopoly with only
2/3 big players, they would "cooperate" to maintain the high prices.

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.

~~~
BurningFrog
Not a big fan of the "but we all know that..." argument by anecdote.

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.

~~~
vmarsy
You're right the telecom has this particularity of not being a "open market"
with these big government regulations and bids for frequencies etc.

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.

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voidmain
I have trouble seeing how this is supposed to work.

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.

~~~
HenryBemis
I believe Uber's tactic is to be the "last man standing". This seems to be a
money pit, and the ones who fund it continuously know about it. It's a game of
patience. When taxis will be nullified, and competition will have ran out of
money, then and only then they will be the crowned. A Pyrrhic victory if you
may.

As for the ethics of Uber, it is like the $1 billion in my bank account. It
doesn't exist :)

~~~
voidmain
Even a hypothetical taxi monopoly faces close substitutes: owning a car for
locals, renting a car for travelers. I still don't see that much room for
price discrimination.

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.

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lucasmullens
Today I had an Uber driver rant to me about a passenger who was charged $110,
and he only got $45.

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.

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tuna-piano
Of course every company and industry wants to price services this way, but few
are able to. Why is that? There are two different ways that I'm thinking about
this.

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.

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sebleon
The flip side is that they can also predict what's the minimum pay an
individual driver is willing to take.

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.

~~~
vkou
I've just done a few Google searches for flights (SEA to SFO, LAX to NYC)
while logged into two different google accounts, as well as Incognito mode.
All the quotes were the same.

I saw the same result on google.ca, and google.co.uk (When adjusted for
exchange rates.)

~~~
kirykl
The airline personalized pricing is (or used to be) based on 'purchase city'
\- they may be using a method to identify it that incognito mode doesn't break

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rebelde
So they looked at the value of my house before quoting me? Maybe that is why I
was surprised to see them want $50 more than normal a few weeks ago to get me
home.

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barronlroth
Just to clarify, this isn't personalized pricing based on how much a user is
willing to pay (user history), but rather pricing based on the "net-worth" of
trip's origin or destination?

~~~
andruby
Knowing Uber's reputation, I doubt that they would use the trip origin and
destination as only input variables. I'm sure they know a lot about the user
from their history, credit card, social media accounts, etc.

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?

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linkregister
"Uber is a company filled with over-optimizers, who will continue to futz with
prices and hope to find equilibrium."

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)

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tyingq
Just creates a war of escalation. Someone will release the "Kayak for
Uber/Lyft/Etc" if it doesn't exist already.

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rdlecler1
Let's not forget that the ride is a commodity. So wealthy people -- who may
use ride services more frequently -- move to Lyft. That is, unless, drivers
turn of the service outside of rich areas and Uber can ensure better supply.

~~~
dbbk
Surely wealthy people would be more concerned with getting a ride faster than
cheaper?

Worth pointing out also that Lyft only operates in the US. Uber is in 81
countries.

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samblr
Once a friend of mine had famously quipped: Pick one profession and any
country in world - rules of that business kind of remain same. Uber is a taxi
company and they are acting like one.

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 ;)

~~~
vkou
That would be beneficial for drivers, and riders, but not very beneficial for
investors.

~~~
rhizome
It's still possible that taxis are not an investment-friendly industry, just
on the fundamentals.

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siquick
Was that a $3.33 fare the video? The minimum fare in Sydney, Australia is
$8AUD ($6USD).

~~~
oculusthrift
do they have uber pool? pool is usually around 3 or less

