The End of a Fair Price: Dynamic Pricing and the Normalization of Gouging

bbor

A yes, capitalism; a system that works perfectly as long as communication and data processing technology is innefficent enough to put a natural efficiency limit on all firms. Reminds me of the scandal around rental price "collusion", which ultimately was kinda just really effective software for doing stuff that would normally be fine. *ETA:* And FWIW, the author here goes about as far towards that as they can -- a shoutout at the end! Anything else would be decried as biased, after all. Great article; shame it'll soon be downranked by the wonderful machines running this place :(

bix6

At 176 pages I may read it but also I’m already so exhausted by this topic since nothing is changing.

sib

"Did you know that home insurers use aerial drones to study your rooftop? If the conditions signal neglect, they might cancel your coverage before an accident." While there are certainly some issues of concern in the article and the reviewed book, the above seems like exactly what insurance companies should be doing: pricing (or making available) coverage based upon risk. This is not much different from an auto insurance company raising your rates (or cancelling coverage) because you've received a number of speeding tickets, which implies increased future risk of loss. In fact, I received a letter from my homeowners insurance company a couple years ago stating that they would not renew our coverage due to conditions that they'd observed (clearly from aerial imagery) including overgrown bushes touching the walls of the house and some larger tree branches growing over the house. I had a landscaping company come and fix the issues, sent my own drone up to take new pictures, sent the company the pictures, and they agreed to continue coverage. And now my house has less future risk of damage. This seems like a win-win for both of us.

nayuki

> Uber is another key villain in Gouged. Per Owens, Uber’s “greatest innovation wasn’t ‘disrupting’ the taxi industry—it was socializing and normalizing the very idea of dynamic pricing. They made us comfortable with the notion that prices could change at any moment.” In my opinion, Uber has several key innovations over traditional taxi services: * An accurate machine-provided fare quote that you can review at your leisure before agreeing to take a trip. (Instead of, like, calling a human dispatcher to ask for a quote.) * The fact that the passenger can't screw over the driver by making fake requests and not showing up, or running off at the end of a trip - because the online platform is in charge of the payment collection. * The fact that the driver can't screw the passenger over by driving extra distance, because the price is set ahead of time. > roughly 75 percent of the items in identical Instacart baskets purchased at the same time varied in price from one shopper to the next If the price differential is large enough, it sets up an opportunity for arbitrage. Maybe if 10 people cooperate and compare notes on each of their Instacart account's product prices, and then make group purchases using the account with the lowest prices... In general, it's harder (though not impossible) to price-discriminate on goods rather than services. If seniors get a grocery discount for example, then it might be worthwhile to hire a senior to purchase things on your behalf.

xnx

Competition, and being willing to shop around is the only thing that has ever kept prices down.

actionfromafar

Insurance companies "from each according to his ability, to each according to our needs".

giantg2

I'm just waiting for the class action suits when dynamic pricing is shown to disproportionately affect protected groups.

underlipton

And they did it the way they always do it: start with poor people and minorities, so that the public get inculcated with the tacit notion that the people being price-gouged "deserve" it.

cyberax

Why would a dynamic price be any less fair? E.g. I'm using a per-mile car insurance policy with a device that monitors my behavior. I'm a conservative driver, so I save a lot of money. But if such systems become universal, stupid speeders will get heavily penalized because they won't be able to offload their risks onto everyone else. So on the one hand, it's more fair to careful drivers. But on the other hand, it will logically remove all the "slack" in the system, which serves as a de-facto social safety net.

Paedor

My issue with dynamic pricing boils down to price discovery and information asymmetry. When I buy something, I really don't know what it's supposed to cost. Barring atypical levels of research, I know how much it's worth to me, and how much it usually costs, and that's it. But my supermarket knows almost exactly how much eggs are worth to me. If it can show me, and everyone else, a different price at different times of day, I'm no longer confident in my ability to "bargain" effectively with the supermarket. So while I can see some strong economic arguments for dynamic pricing, especially in cases like power or water usage where there's a very inflexible supply, I basically just don't trust that we won't get screwed. Fixes could be possible. Maybe with a third party system for monitoring prices, quality, etc. But it's hard, and pretty obviously not solved in the current market, much less one with even more price complexity.

cortesoft

So I think there are a lot of good arguments to be made against price discrimination, and I don't think it is obvious what the best answer is. However, I have to push back on the idea that increasing corporate profits during the pandemic means that the price increases were not market based, or that companies had the option to just keep prices the same and everything would have continued as normal. I feel like this conclusion (that companies should not raise prices if profit is high) shows a fundamental misunderstanding of what a free market price means, and why prices are tied to supply and demand and not profit. SO MANY people seem to think prices are (or should be) set to "total cost to create and distribute the good + a fixed profit margin", and that market competition means every company working to drive down the cost to create the good, which would mean they could sell for less than their competitor. But that isn't how prices are set. Prices are only slightly related to the cost to manufacture and distribute the good, and are mostly based on the demand for a good and how much supply there is. So why would profits go up during a shortage situation like the pandemic? Well, imagine you are a company that makes widgets, and under steady market conditions you sell 1000 widgets a month for $50, and you have a warehouse that holds about 6000 widgets (a 6 month supply). It costs you about $45 to manufacture and distribute the widgets, so you make a $5 profit on each one you sell. Now the pandemic happens. Let's suppose your supply pipeline is completely shut down, and you can't get the materials to make more widgets at any price. However, you still have the 6000 widgets in your warehouse that you have already made. Based on your experience and the situation, it seems like you won't be able to get any new raw materials for a year, and your competitors are all in the same situation. Now, you could keep selling your widgets at your normal price, but in 6 months you will be completely out of widgets to sell, and you won't be able to make any more. So you would sell all your widgets in the first 6 months, and then people would be unable to buy any of your widgets for at least 6 more months, no matter how much they are willing to pay... you literally won't be able to make any more to sell. Or, you could raise prices enough so you only sell 500 a month, which will make your 6 month supply last a year. Since all the widget manufacturers are in your same situation, they all choose to do the same, and widgets go up a lot in price. Of course, your company doesn't have any extra expenses (you aren't buying any new raw materials), so the extra money you make per item is profit. Your profit increase a bunch during that time period. Is this bad? Should the manufacturer just keep selling the product at the traditional price? If they do that, there will be no product for anyone in 6 months. Should they keep the same price, but only sell 500 a month? If they do that, then they are going to sell out very quickly every month, and half the people who want them won't get them. Of course, half the people that would want them aren't going to get them anyway, but how should we decide who gets them and who doesn't? We could do a lottery, but that does not seem very efficient; not everyone needs a widget with the same level of need. Some people really need the widget, because it is vital to something they do, and some people just kinda like widgets but would buy something else if it was too expensive. Making it more expensive weeds out the "kinda want it, but don't need it" consumers and lets the consumers who REALLY need widgets get them (for a higher price). Look, we can argue for a long time about whether this is the most fair way to distribute goods. While the increased priced does weed out people who don't REALLY need the item, it also weeds out people who need it but can't afford the higher price. But you are going to end up with people not getting the item who want it no matter what, and having some mechanism to order consumers by who actually needs it the most is a much better selection mechanism than randomly choosing. It also shows this isn't just companies raising prices for no reason.

abdullahkhalids

Whenever you analyze a dynamic system, the primary question you ask is, which direction will it evolve in, and will it hit some steady state? If you apply this thinking to the economic system practiced in most countries, the answer is that the system forces have been set up in a way that the capital owners need to be paid back on an exponential schedule, and there are barely any counter-forces to this. Hence, the system will never hit a real steady state. People will continue to creatively design more and more immoral methods of extracting monetary value from a finite system that cannot indefinitely and continuously grow exponentially. There is no other way to pay back the capitalists. There is no counter-force.

GuB-42

Price gouging and discounts are exactly the same thing, seen from a different angle. You can look at the people who pay more and complain, or you can look at the people who pay less and give praise. It is kind of obvious, and supported by economists who are the experts in this field, but the article dismisses it as bullshit without much proof. It says differential pricing benefits no consumer, and yet, I managed to travel for way bellow cost. If it wasn't for dynamic pricing, I wouldn't have travelled at all. Of course, some people were price gouged, someone has to actually pay for these costs, but these people could afford it, otherwise they wouldn't be in. The article then mentions overall price increases. Well, yes, sometimes prices increase, for good or bad reasons. Maybe the costs have increases, because there is a war somewhere or something, and the company has no choice but to increase the price to stay in business. Or maybe the company finds itself in a monopoly position and just wants to make more profit. In any case, the price would have increased, dynamic or not. And the solution is not to ban dynamic pricing, it is to avoid getting into wars for the first one, and break down monopolies for the second. There is also the question of spying on people, but if you don't want spying on people, ban spying on people, dynamic pricing or not. You don't need to spy on people to do dynamic pricing, and many businesses who don't do dynamic pricing spy on their users. Uber is given as an example, saying that they raised the prices and paid the drivers less. Well, of course they did, at the beginning they operated at a loss, this can't last, at some point they need to make profit. This, by the way, is one of the many shady things Uber has done, a company for which the entire business model is not to play by the rules. The problem is not price gouging now, it is that they were too cheap before, and yes, it is bad, because that's how you unfairly drive off the competition that can keep your prices (dynamic or not) in check later on.

cbdumas

If a firm has that kind of pricing power of course they will use it. Competition is the only thing that restrains this. Most firms don't have this kind of pricing power at all, if Safeway marked up all their groceries to my maximum willingness to pay I would of course just go to Kroger or the local co-op or a restaurant for dinner.

gumby

Of course in enterprise sales this has been the norm since forever, referred to as “value pricing”. Back in the early days of laptops, I went to Oracle to give them a quote; while cooling my heels in the lobby I looked round, realized I was being an idiot, and so opened my laptop and increased the prices across the board.

timoth3y

I have a a modest proposal. Any company wishing to use this kind of dynamic pricing should be willing to submit itself to "dynamic taxation". Under dynamic taxation, we the public, would examine that firm's books at the end of the fiscal year and decide how much taxes they owe based on their ability to pay. Note that companies are not natural people, they do not have a fundamental right to exist. Just like under dynamic pricing, if the shareholders and board think their dynamic taxes are too high, they are perfectly free to just dissolve the company and use their capital elsewhere.