If you want to understand the future of capitalism then there are two important test cases. Uber and Videogames. Whilst the former is something more of you will be familiar with, the behaviour is more pernicious in the latter. What both can teach us is that dynamic pricing is on the rise and will, unless regulated, become ingrained into how we buy products.
Let’s start off by considering how a market decides prices. The producers and the consumers find a price and quantity that maximises their utility. This level is found when the supply curve meets the demand curve.
In this case both have a surplus, the consumer surplus comes from what they’d be willing to pay but don’t have to. The producer surplus comes from the higher value placed on their product. Illustrated here:
Now, consider the behaviour of Uber. A company that varies its price based on both supply, number of drivers working, and demand, number of riders who need to travel. They vary their pricing to force drivers and riders in and out of the market to reach the maximum efficiency. In practice this also theoretically ensures the people in most need get the rides.
However, suppose for a second that you are a regular Uber user. The company has a record of your rides and how much you spend. They also have access to some of your personal details. They can use this to build up a profile of who you are, how much you might earn and how much value you place on the rides.
This information can be used to tweak your specific algorithm, to adjust the price you’re seeing. If they have profiled, you as earning more you might see higher prices. If they know you’re willing to pay £10 for the ride to work most days, then on days when it should dip below that level do they have to show you that? Or can they exploit your willingness to pay more?
Now, I have no proof that Uber do this, nor do I have proof that they intend to. However, it has happened before. Amazon were found in 2000 to have been showing customers different prices based on what they believed they could afford. This allows the company to eat into the consumer surplus by tailoring prices to customers.
Imagine you are stood next to a friend that earns more than you. You decide to split a ride to work and so both open Uber to check prices. Her higher earnings mean that the app could profile her as a higher spender and offer her a higher price for the ride. She’s willing to pay it, after all that’s what she believes it costs.
You wouldn’t actually know this was happening unless you both checked the app at the exact same time for the exact same journey.
This is more than just surge pricing, this is differential pricing.
Again, Uber do not engage in this practice to my knowledge. So, let’s talk about an industry where they do.
Which is where we come to videogames. A medium where these practices have become increasingly common.
Videogames are an interactive medium, the player expects the game to require active input. This gives the producers two things that make differential pricing easier. A log of player behaviour and a license to ask the player questions.
Videogames have developed an entire industry sector dedicated to bullying, nagging and boring the player into handing over more money. There are entire videogames dedicated to breaking a player down to the point where they’re willing to pay more money just to continue playing.
This is worrying, but with improving algorithms the games will no longer just psychologically bully the played but tailor that experience. They can use algorithms to assess the amount of disposable income a player might have, based on purchasing habits, tastes and information from player accounts, they can then offer the player the exact price that is right for that player.
The price that they are willing to pay to end the bullying.
This may sound unlikely but there are entire companies dedicated to building algorithms to enable this predatory behaviour. Scientific Revenue, one such company, offers clients the ability to tailor price levels to players. This would then be used to hike prices for desperate players or lower prices to entice new players.
So, this model exists, it’s currently of questionable legality, and it is designed entirely to take every single penny from its users.
A question worth asking then is whether it can be used in industries that don’t necessarily require the same level of engagement. How can you make a consumer pay extra for a film when that’s a single piece of content? Here is my theory:
I love the Marvel movies. I absolutely adore the interconnected worlds, the rich lore and the genuine commitment to making enjoyable films. I also love the work of Taika Watiti. Watiti is a brilliant director of such gems as “The Hunt for the Wilderpeople” and “What We Do in the Shadows.” Watiti is directing the new Marvel Film, Thor Ragnarok.
I have watched each trailer maybe a dozen times, I’ve googled leaked footage and I’ve obsessed over possible spoilers. This data is all out there, on Youtube, in my Google searches and my Chrome browsing history.
Youtube also offers the ability to rent movies. Now if I want to watch Thor Ragnarok on Youtube in future, could they raise the price because they know how much I want to see it? Could they have profiled my income, after all they know my age, demographic and what sort of websites I frequent, and gauge exactly the level I’d be willing to pay?
There is a growing industry building around the design and use of these algorithms. They are designed for a single specific reason, to take as much money as is possible from the most consumers. They are deliberately predatory. The Producers will swallow more and more of the consumer’s surplus until the market is irreparably waited in their favour.
They are also an example of regulation failing to keep up with advancements in technology. As more and more payments are handled digitally it’s harder for us to scrutinise pricing. It is almost impossible for us to know what someone else, somewhere else will be charged. It ultimately removes the ability of a consumer to make a rational decision based on price and aims to use the consumer’s own data to bully them into purchases.
There are of course things we might do to minimise these effects. We can call on our Government to pass laws restricting differential pricing. We can be more careful with access to our online data. We can scrutinise prices to check for trends and purchase in public settings where this behaviour is harder.
However, it seems inevitable that without significant changes in how companies are allowed to behave that these deeply unethical practices will continue. They are an inevitable result of profit driving technological advancement.