Fixed prices for fruit at a market

Sprig follows Uber; is our society up for sale?

Sprig recently announced plans to launch “dynamic delivery fees,” its version of Uber’s infamous surge pricing. Is this the beginning of a trend that deepens the influence of wealth throughout our society?

Sprig will now charge variable delivery fees

For most of us it may be difficult to digest that what’s normal on some days becomes out of reach on others. This break in expectations is not something we are used to, especially for everyday consumer items. Yet is it a sign of things to come; will advances in technology, increases in data availability and shifts in psychology mean that dynamic prices are here to stay?

Uber’s surge pricing makes rational sense

There has of course been much written about Uber’s controversial model. The basic argument is that it follows sound economic theory.

The supply-demand curve is a fundamental operating model for economic analysis

Price elasticity of demand explains how demand will change as price varies. Uber’s argument has always been that it is a marketplace and needs higher prices at times of unmet demand to encourage supply (incentivize drivers) and reach equilibrium. A more detailed and impassioned defence of Uber’s model is given by investor and board member Bill Gurley here.

“Surge pricing only kicks in in order to maximize the number of trips that happen and therefore reduce the number of people that are stranded.” — Travis Kalanick

Most people who dislike or despise surge pricing don’t question the economic principle — they complain about it’s application. Is it really fair to charge people different prices for essentially the same tangible benefit? Most Americans thought not, even calling it illegal and earlier this year Uber agreed to restrict surge pricing at times of natural disasters. [1]

But why is Uber singled out for criticism when surge pricing (by other names) has been around since the start of trading. Demand has always driven cost and modern examples of this include eBay’s auction model, lunch prices at restaurants and airline tickets. Is perceived injustice a temporary reaction while our psychology adjusts to this pricing strategy?

Lessons from the airline industry

The airline industry shares some characteristics with the taxi industry and it’s worth understanding how ticket prices for flights became such a complex and confusing mess.

Heavy state control of prices and operators created a monopolistic competition model where airlines benefited from inflated demand and weren’t incentivised to fill planes. However when the Airline Deregulation Act was passed in 1979 in the US, new entrants sucked away profitability from the established players such that they were compelled to search for sources of revenue. They innovated by segmenting passengers (business vs. leisure) and leverage the different price elasticities for each group. [2]

This system has evolved to include multiple parameters that calculate the combination of prices for seats that will lead to the highest revenue per plane. And it’s not just fares that are subject to this kind of dynamic pricing!

Spirit Airlines introduces higher baggage fees during peak travel season

However it is important to note that the objective for airlines is to maximise profitability rather than better fulfil demand, as Uber’s stated objective.

But what about fairness and equality?

Thus far economics and history seem to support surge / dynamic pricing gaining traction. Is there an argument that defies these? Michael Sandel, political philosopher and Harvard professor makes a compelling case.

Michael Sandel’s short TED talk on how marketization is undermining democracy

He explains how we’ve drifted from a market economy to a market society where market forces drive every aspect of civil and personal life. He questions the impact this will have on non-material spheres of life, such as shared civic responsibility and our basic freedoms as citizens or human beings. [3]

His concerns resonate deeply. Personal wealth is becoming a more decisive factor for access and freedom — reducing equality and increasing the rich-poor divide. Services that used to be available for all, regardless of background, are now being segmented by affordability. My generation accepted that for international travel, has started accepting that for local commuting and may have to accept that for food… Are there aspects of our lives for which we shouln’t accept it?

So how do I reconcile being in the startup world and being concerned about where it’s going

By working for a startup and harbouring ambitions of my own business, I of course accept and promote capitalist culture. But I’m discomforted by some trends (e.g. this or this) that seem to attack the fabric of justice and reduce social mobility. Surge pricing might be the most obvious candidate but we all have a responsibility to balance our right to make money with the responsibility to provide opportunity to the underprivileged. Is there anything we can do as consumers to make companies more accountable for social equality?

(P.S. I prefer Lyft and Thistle*)


References

[1] http://www.theverge.com/2014/7/8/5881535/uber-price-gouging-surge-pricing-new-york-agreement

[2] https://www.iwu.edu/economics/PPE08/alex.pdf

[3] http://blogs.spectator.co.uk/books/2013/05/michael-sandel-interview-the-marketization-of-everything-is-undermining-democracy/

*Lyft because I find the company to be friendlier than Uber. Thistle because I help them with marketing. And they have lots of delicious veggie options!


I tweet about products, user onboarding, smart UX, and other useful stuff.

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