Tuesday, 23 May 2017

Update: Uber is starting to price discriminate

Last year I wrote a post about Uber and price discrimination. At the time, Uber was arguing that they don't adjust their surge pricing to take advantage of people whose phone battery is low. Here's what I wrote then:
So, should we believe that Uber is not price discriminating? Price discrimination increases profits when firms can do it effectively. This only requires three conditions to be met:
1. Different groups of customers (a group could be made up of one individual) who have different price elasticities of demand (different sensitivity to price changes);
 2. You need to be able to deduce which customers belong to which groups (so that they get charged the correct price); and
3. No transfers between the groups (since you don't want the low-price group re-selling to the high-price group).
The first condition is clearly met, and presumably Uber's app knows when the phone is low battery (it's probably buried in the terms and conditions for the app, which almost no one reads). Since customers don't know the battery status of other Uber customers, then the third condition is likely to be met too. So, if Uber isn't price discriminating on the basis of battery level, they are leaving potential profits on the table. Uber shareholders probably wouldn't be too happy to learn this. So, I think it's hard to believe that Uber don't take a lot of information about their passengers (including potentially the remaining battery life of their phone) into account at least at some level - perhaps they are not price discriminating via the surge price (i.e. the multiple by which they increase prices), but via the underlying base price?
Now, it seems that Uber is moving to use price discrimination more broadly. This New Zealand Herald story today notes:
Imagine you live in Sydney's lavish suburb of Bondi, while your friend lives in one the city's lower socio-economic regions.
You both order an Uber home at the same time, with each ride having identical demand, traffic and distance travelled.
Yet, you are charged significantly more for the service because of where you are travelling.
This could soon be a reality with Uber introducing "route-based pricing" — a new fixed rate fare system for its UberX service that charges customers based on what it predicts they would be willing to pay.
There is more on this story here, and here. In this case, those travelling to a richer area of the city may have less elastic demand for the ride (because the fare will take up a lower proportion of their income) compared with those travelling to a poorer area of the city. So, the optimal mark-up (of price over cost) is greater for fares to richer areas than to poorer areas, and the price discriminating firm will charge a higher price for those travelling to the richer areas.

Is it possible that this bit from the story might be both true and false at the same time?:
While this might sound like the service is separating its customers based on income, Uber's head of product Daniel Graf said this wasn't the case.
"This is not personalised. This has nothing to do with the individual," he told Business Insider.
Technically, Uber aren't separating customers based on income (because they don't know the customers' incomes). But they are separating based on route, and some routes are clearly more popular with higher-income customers (and that is why it is effective to price discriminate). The prices may not be personalised, in the sense that every person pays a difference price for the same route in the same market conditions, but it isn't a big step from third-degree price discrimination (group pricing, which is what they are currently doing) and first-degree price discrimination (personalised pricing, where every customer pays a different price, based on their own willingness-to-pay for the service). Uber can gather lots of information on their customers' past behaviour, including which fare prices they were willing to pay (or not) in the past, and use that for pricing in the future.

Price discrimination is not illegal or even unfair in many cases (this is a point I have made before). However, this is definitely an unfolding story that it would pay to keep an eye on.

[HT: Marginal Revolution, for the additional sources on this story]

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