Friday, August 22, 2014

Innovations in Horse Hockey - James Surowiecki Spins Uber Pricing

Unbelievable. Let me start by saying how shocked I am -- I've read James Surowiecki's The Wisdom of Crowds and I think it's awesome. It's on my recommended reading list. So imagine my surprise when I realized that this article that I just read on the MIT Technology Review site about Uber's surge pricing was, in fact, written by Surowiecki. Mind-blowing, and not in a good way.

The headline and subhead provide a pretty good synopsis of the theme here:
In Praise of Efficient Price Gouging
Uber’s most important innovation is the way it prices its services. But that innovation has not been unreservedly welcomed by customers. They’re wrong.
While he addresses the controversy around Uber's surge pricing including highlighting some of the public criticisms, Surowiecki eventually gets to characterizing this surge pricing model as similar to airlines, hotels, and happy hours -- all using variations on pricing to address demand at different hours. He then endorses the Uber position that their surge pricing helps put additional drivers on the road.
What this means is that in the case of Uber, surge pricing doesn’t just make rides more expensive (as is the case with airline tickets or hotel rooms at times of high demand). It also expands the number of people who are actually able to get a ride. Customers pay more, but they also get a ride that they otherwise would not have gotten. This is exactly how a market is supposed to work: higher demand induces more supply.
You know who else is a fan of Uber's surge pricing, "venture capitalist Bill Gurley, who’s an Uber board member." Surowiecki links to Gurley's blog post noting,
that when Uber first tested dynamic pricing in Boston in 2012, it was able to “increase on-the-road supply of drivers by 70 to 80 percent."
In Surowiecki's article and Gurley's blog post, much is made of this aspect of increasing supply as though multiplying the rate a customer pays mines black cars from empty space. It's as though price multipliers suddenly connect with the philanthropic aspects of humanity -- "my God, it's after 1:00am on a Saturday in Boston -- there are people who need rides in black town cars. Jeeves, bring the vehicle around. There is money to be made and riders to be saved." Or, "sure it's snowing and I'd rather be inside where it's warm, but there are desperate people out there willing to pay 8X the normal fare for a ride. I must help them."

The more nuanced reality is that there are only so many vehicles that are around in the first place. First and foremost, these drivers and cars that Uber is "putting on the road" with their surge pricing don't just appear from the clouds. We're talking about people who've signed up with Uber and met certain, rather specific vehicle requirements. Them "not being available" is not a question of not existing, instead it's a function of a free market where one side says, "you know, I have better things to do with my time than participating in the Uber system."

The way that the business is set up, drivers aren't Uber employees. This is a fundamental element of the problem. Uber can't make them stay on the clock, but it does "fix" the pricing. So instead they say, "suppose we change the system and give you license to gouge riders during these periods?" 

My favorite quote around this comes from the Gurley blog. In "Clarifying Certain Specifics Regarding Uber", Gurley says,
Uber is remarkably transparent about its dynamic rates. Ever since the company first encountered feedback about its pricing model, the company has gone out of its way to make sure that customers are aware of the policy and how it works.
The emphasis is mine. But that's one of the other elements that's missing from these surge pricing justifications. When Uber first rolled out surge pricing, they didn't even tell you it was in effect. Your first notice was when you received the bill. You can argue that those are the pains of a growing start-up, but I think it speaks to the company values.

Regulation. It's one of the words that the Libertarians and the followers of Ayn Rand hate. It's that thing that they're trying to disrupt, the thing that they claim is that's holding us all back. It's the rules and policies that govern the taxi industry and the limo industry. Somebody from Uber's PR team can probably tell you about all of the crazy rules that they impose...

But if you look around the world, there are places where you are warned about trusting the taxis. You're warned about getting ripped off, charged crazy amounts, driven on circuitous routes. Even here in the states, some cities offer flat rates from the airport to downtown so that you can feel comfortable about not getting ripped off as your welcome to the city. Taxis are part of our transportation infrastructure, and many aspects -- including the fare -- are part of the social contract that we set up with these companies in trade for letting them work that business.

While there isn't the existing software infrastructure to make the taxi experience equivalent to the Uber experience, there are certain things that you can count on with a metered taxi. When you get in, the metered rate will be the same, regardless of time of day or day of the week.

I Like Aspects of Uber, but...
Don't get me wrong. I've used Uber and I like aspects of their service. I think that, overall, the software interface for requesting a car, the detailed receipt, and the streamlined payment process are all excellent. Often, we'll choose an Uber ride because the vehicles are usually clean and and free of unusual or unpleasant smells. At the same time, many aspects of the way they do business offend me. And I refuse to use Uber when they run surge pricing.

Ethical existence is not as simple as supply and demand. As a society we frown on certain types of marketplace behavior like war profiteering or profiting on disaster. Surge pricing during floods and snow storms is an example of that same kind of bad behavior. But with their surge pricing, Uber's ethical lapse is more than just billing during disasters. The "multiplier" function that they use for surge pricing is particularly egregious. Not only does a multiplier make it more difficult to estimate what your final fare will be, it magnifies all of the negative aspects of the transaction.

There has already been a lot of digital ink spilled over Uber's surge pricing. What spurred me to write this post was not the overwhelming need to rehash those same points. Rather, it was Surowiecki's contention that, "Uber's most important innovation isn't a car service, it's a pricing algorithm". I call bullshit on that. There are of historical examples of dynamic and surge pricing. And profiteering. No, I don't see how this is innovative.

Innovative might be something like, an electronic pre-commitment to a tip amount as an incentive for a pick-up during "high-demand" periods. Innovative might be something like a capped price -- sort of a reference price -- with all rates discounted from that defined cap.

When I first read Surowiecki's article, my instinct was that this was an astroturf piece. That's why I was so disappointed when I realized who's name was on the byline. My biggest take-away from this is sort of a "please, say it isn't so..."

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