Monday, January 9, 2012

Price Discrimination Can Be Good!

An interesting NYTimes report by Nick Bilton talks about the Uber online service for ordering a car service, and how the workings of supply and demand can seriously disrupt customer relationships. The issue was a "surge pricing" feature that raised the cost of a ride to a New Years party, which cost $27 to get there, to make the ride home cost $135. Bilton nicely summarizes the issues in dynamic pricing.

I posted a comment on that article suggesting that FairPay provides a solution to this problem -- a solution based on using the Internet to facilitate a relationship view of price negotiation, instead of a single transaction view. This post elaborates a bit on my comments, and highlights one of the major advantages of FairPay that make it more attractive and more economically efficient than conventional methods.

The real problem of dynamic pricing (described in the article) is one that can now be fixed in a “post-modern” economy. The problem with dynamic pricing is that it is set unilaterally by the seller, and imposed on the buyer  on a take it or leave it basis. This is also called price discrimination (and in some cases, price discrimination is actually illegal). But as Bilton says, such discrimination is economically optimal. That is why it is widely used in the hotel, airline, and car rental businesses. There buyers do live with it -- but still with considerable resentment. I suggest the way to make it acceptable to buyers is to involve them in the pricing decision.

That is one of the key features of FairPay.  FairPay sets prices based on a dialog with the customer, and uses Internet tracking of such prices to manage fairness over a long-term customer relationship.  The long term relationship view is as suggested by Liran Einav (a Stanford economist) in the article). With FairPay, customers have significant participation in pricing, and can be asked by sellers to include a dynamic premium (such as for peak time surges) -- but they can decide just how extreme that premium should be. Sellers get to determine if the buyer is generally being fair about that, and continue to allow FairPay pricing in the future to those who are reasonably fair. True, few buyers might accept a price of $135, but many might accept $50-75 and some even more. The seller can also be more restrictive during peak times, offering surge period FairPay pricing only to those who who have a history of agreeing to a reasonable level of surge premium, while let less flexible users might be permitted to use FairPay pricing only during times of normal demand. Thus "discrimination" can be good, when done within reason, at agreed-upon levels, based on mutually understood reasons.

Another factor in customer acceptance is predictability, as in the cited quote of Dirk Bergemann (economist from Yale). I suggest this is really a problem with unpleasant surprises, and with price changes that seem unfair.  The perceived unfairness of dynamic prices and discrimination, such as with the New Year's surge, or for snow shovels or flashlights after a storm, is the "unfair" external imposition of higher prices. Here again, when the customer gets to set the level of dynamic premium, that changes it to a fair process.

Of course dynamic discrimination should also apply in the other direction, to provide discounts at slow times, as well! That is an equal part of fairness, and FairPay can provide that too. When there is lots of supply and little demand, the customer should be given the freedom to set a lower price (within reason). FairPay brings that kind of sensibility back into pricing. The time-honored practice of individual negotiation allowed such issues to be factored in as appropriate and agreeable. We lost that in 20th century mass-marketing, but the Internet now lets us regain that in a new and better way. That is described more fully elsewhere in this blog, and the Web site.

I suggest FairPay could be a very effective solution for Uber, and for many others like them.

[UPDATE 8/1/16:] See additional comments in this newer post:  Price Discrimination for the Good!

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